When Exceptions Apply
Transactions in securities such as stocks and bonds originate in investment accounts in two ways: voluntary/investor-directed activities or involuntary/mandatory activities. Most transactions are investor directed. These are intentionally executed by the investor or by their Trusted Investment Professional, on the investor’s behalf. Investor directed activity includes transactions such as new investment purchases, investment sales and transfers of investments between accounts. Other transactions are not within the investor’s control at all. Involuntary transactions usually result from actions taken by corporations in the market place. Examples of such actions are corporate take-overs, mergers, spin-offs, and dividend payments.
On the surface, many of these transactions appear to result in capital gains, taxable income or dividend distributions. But this is not always the case as exceptions may apply. The tax implications for investors for transactions that take place in their taxable accounts are complex and not always well understood. Choosing the most effective and timely response to these transactions presents challenges for Canadian investors, their advisors and tax accountants.
Reducing your Tax Bill
Whether transactions are directed by you or by the company whose shares you own, there are circumstances and opportunities where you can defer, reduce and even eliminate your tax liability. The Canadian Income Tax Act (“ITA”) allows for some relief. Specific transactions allow you an opportunity to “elect” an alternate tax treatment that may be beneficial. In general, these elections tend to allow Canadian investors to maintain a tax-neutral position for specific transactions that were not completed at their discretion. Other elections allow investors and their spouse to minimize their household tax bill, through income splitting provisions. If executed correctly and within prescribed timelines, each of the elections offer Canadian investors tax savings in the current taxation year and into the future.