Before you cash in your non-registered investments, consider the possible implications. Redemptions from a non-registered account are deemed taxable events, meaning that you may trigger capital gains or losses. A capital gain occurs when the investment is sold at a profit over the adjusted cost base (the original cost plus related expenses). The opposite is true for capital losses. These gains or losses must be claimed on your income tax return.

Half of the value of a capital gain must be included as income. Assuming you are in the highest marginal tax rate, you could be facing a large tax bill come April. The additional income generated from capital gains could also slip you in a higher tax bracket, which could increase your income tax even more. And the increase in your net income could mean claw backs if you receive certain government benefits and credits. Old Age Security, provincial tax credits, GST/HST credits, the age amount, and the medical expense credit are some of the items that will be affected by your higher income.

Capital losses have their own set of challenges. Capital losses can only be used to offset against capital gains. If you don’t have any capital gains in this year, or the previous three tax years, you will not benefit on your current return by selling at a loss. Keep in mind, also, that if you or any affiliated person (your spouse or common-law partner, or certain corporations or partnerships you are involved with) purchase the same security in the 30 days after your sale, superficial loss rules will apply. This means that you cannot claim the capital losses. Instead, the amount of the capital loss will be added to the adjusted cost base of the new investment.

When selling your non-registered investments, be aware of all tax-related consequences. It may be appropriate to sell your investments strictly for tax purposes. There are many ways to use capital gains and losses to your advantage, if you know what you are doing. Consult with a professional, keep your money working for you, and make sure you understand all of the tax implications of your decision.

This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of Fundex Investments with your topics of interest at 798-2421 or E-mail at rick@invested-interest.ca.