Are you afraid of the taxman?

Keyboard indicating it's time for taxes. (Fotolia.com)

Keyboard indicating it's time for taxes. (Fotolia.com)

Barbara Stewart, Special to QMI Agency

, Last Updated: 4:44 PM ET

As we head into the month of Halloween, investors may be haunted by past October frights such as the Crash of '29 or Black Monday in '87.

On a relative basis, life seems pretty good these days. For the nine months of the year, the U.S. market has enjoyed very strong gains with the S&P 500 index up 18%.

The Canadian market has not fared as well with the TMX index up just under 3%. While market experts have their own expectations for the balance of the year, there is no way of knowing who will end up being right.

Let's face it: anytime you are invested in the stock market you must live with uncertainty. Over time, you are likely to be rewarded for assuming the various risks that come with the territory, but you never know what will unfold.

One of my habits this time of year is to take stock (as it were) of how things are looking from a tax perspective. While it is never a good idea to let tax implications alone direct major investment decisions, there might be an opportunity to do some tweaking in order to lessen the tax burden at the end of the year. At the very least, it makes sense to be aware of potential tax bills owing next April.

As this can be a bit confusing at times, let's review the difference between realized and unrealized capital gains. A capital gain is the amount you have earned from the time you bought a stock (or other security). It is only a realized capital gain if you actually sell the stock and realize the profit. You have to pay tax on your realized gains, but you don't have to pay tax on unrealized gains (also called paper profits).

Every October I create a report that shows the realized capital gains or losses for each of my client's non-RSP accounts for the year-to-date, giving them a snapshot of what their tax situation might look like. Of course things could change over the balance of the year, but this provides a reasonable basis for discussion.

If there are sizable realized gains, investors can:

  • Plan to keep some funds aside for the eventual tax payment, and
  • Review their overall situation to see if there are potential unrealized losses that can be triggered to reduce the gains, or unused loss carryforwards that might act as an offset. As always, talk to both a tax adviser and investment adviser so all implications are considered.

Whether we are in a bull or a bear market or somewhere in between, it always pays to be tax aware.


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