The Montreal Gazette – Tax Strategy: Deadline for tax-loss selling is two days away

Matt C. Altro is a regular contributor to Paul Delean’s business column in the Montreal Gazette. Click here to view the article online or scroll down to read Matt’s answer to the second question below.

Tax Strategy: Deadline for tax-loss selling is two days away

PAUL DELEAN
The Montreal Gazette
Monday, December 21, 2015

Tax-loss selling and the tax-filing obligations of U.S. citizens were among the topics raised in the latest batch of reader letters. Here’s what they wanted to know.

Q: “I have some energy stocks that took a beating this year and understand there might be some tax advantage in selling them. How does that work?”

A: Tax-loss selling, as it’s known, is where you deliberately take a capital loss by selling losing stocks, with the intention of reducing your tax bill now, later, or retroactively. The losses apply first against any capital gains you may have this year, but then can be used retroactively against any gains already declared in the three previous tax years. They can also be carried forward indefinitely. The strategy only works for investments held in unregistered accounts, and you cannot buy back the same stock within 30 days of selling or the loss won’t be recognized by the tax department. The deadline for 2015 tax-loss transactions on Canadian and U.S. stocks is Dec. 24.

Q: “I’m a U.S. citizen from birth 57 years ago, but I haven’t filed a return since 1988, when I moved to Japan for five years. I then moved to Montreal and have paid Canadian taxes since 1994. I know that being out of the U.S. doesn’t get me off the hook for filing, but there used to be a rule for ex-pats that you didn’t have to pay U.S. taxes if you earned less than $70K abroad, which was my situation, although I can’t prove it for the years I was in Japan. The apartment I live in is owned by my American mother, now 88 and living in California. When she dies, it’s supposed to be transferred over to me, but what is the U.S. going to say about taxes? I’ve been a Canadian citizen for about 10 years now, but haven’t renounced my American citizenship.”

A: As a U.S. citizen, you were obliged to file annual tax returns with that country even if the amount earned abroad fell below the “foreign earned income exclusion” on up to $100,800 (U.S.). You are also now required to file annual disclosures identifying foreign financial accounts and assets. “With Canadian financial institutions now obligated to share information on the accounts of U.S. persons, it is becoming increasingly difficult to hide from the IRS,” noted Matt Altro of MCA Cross Border Advisors Inc. He recommends “becoming compliant” with the U.S. tax department. “Instead of having to retroactively file for all the missing years since 1988, you may be eligible to use the ‘streamlined’ filing procedure, which requires filing only three previous years of tax returns and six years of FBARs (report of foreign bank and financial accounts).” With regards to the inheritance, the U.S. has an estate tax but no capital gains tax at death, so there will be no U.S. tax impact for either of you, provided your mother’s estate is below the estate-tax exemption threshold, currently $5.4 million (U.S.), Altro said. Because your mother is not a resident of Canada, however, capital-gains tax may be owed here by her estate when the Montreal apartment is transferred to you, since it will be treated as a disposition for tax purposes. But if the apartment was her principal residence for some of the years she owned it, there could be some tax relief. “There may also be a tax saving opportunity in transferring ownership of the apartment to your name,” Altro said. “Doing so would trigger a current tax liability to your mother on any accrued gain up to the time of transfer, but could minimize ultimate tax by shielding any future appreciation from taxation via the principal-residence exemption (which would apply to you),” Altro said.

The Montreal Gazette invites reader questions on tax, investment and personal-finance matters. If you have a query you’d like addressed, please send it to Paul Delean, Montreal Gazette Business Section, Suite 200, 1010 Ste. Catherine St. W., Montreal, QC, H3B 5L1, or by email to pdelean@montrealgazette.com