January 26, 2016
Keep government’s hands off gold profits
Physical gold and silver buyers tend to hang onto their purchases. That means tax issues are often dealt with bysuccessors after they pass on. The stakes are higher for gold investors and traders. For them TFSAs and RRSPs can be valuable tools.
With tax season around the corner, Canadian taxpayers, who fork over half of the country’s annual output to federal, provincial and municipal bureaucrats, have a strong incentive to minimize the damage. That includes gold buyers, traders and investors, many of whom are unaware that the Canada Revenue Agency and its junior partners, will want their cuts of any resulting profits.
According to Carol DeMone, a chartered accountant and manager at Crowe BGK, earnings on gold holdings are taxed as capital gains, in the year they are sold. “There are ways to minimize the effects,” says DeMone. “However in most cases you’ll need to plan in advance.”
RRSPs and TFSAs
One of the most obvious tax advantaged ways to hold physical gold, is through traditional tools such as self-directed Registered Retirement Savings Plans and Tax Free Savings Accounts. “We introduced innovations several years ago that made us the only Canadian company that allows investors to hold physical gold in these accounts,” says Edward Kholodenko, CEO of Questrade. “Interest has been growing. That’s particularly true during times when gold prices are rising, as they have been since the start of the year.”
Gold holdings in RRSPs and TSFAs are treated much the same way that other assets in the plans are. When you buy or transfer physical gold into your RRSP, you get a tax deduction for the amount transferred. That reduces the tax you pay for that year. Increases on the value of your gold holdings are not taxable in the RRSP itself. However the amounts are taken into your taxable income the year they are withdrawn from the plan.
You are not be eligible for any deductions when you buy gold through a TFSA. However gains you earn on the value of the gold are tax exempt during the time it was regarded as part of your TFSA.
Gains accumulate over time
The fact that profits on physical gold holdings are taxable upon disposition, often comes as a big surprise to buyers, particularly those who buy government-issued coins, which in many respects are money. As such, the onus is on them to remember to report those gains when they dispose of their gold. The one exception, according to DeMone, relates to individual coins that fall into the “listed personal property” category as defined by the CRA, and are bought and sold for under $1,000 – these are exempt from capital gains taxes.
Another challenge in computing the taxes due on profits earned on physical gold holdings, is that buyers tend to hang on to their purchases, to take advantage of the yellow metal’s beauty, the sense of history and pride it provides and its function as a store of value. Holding periods thus often extend into decades, which means that buyers can literally forget how much they paid for the product. That can be an issue as the gains may well be substantial. For example, despite the recent bear market, those who bought gold at the turn of the century when it was selling in the USD $250 - $300 an ounce range, likely tripled or even quadrupled their money.
Keep your receipts: disposal and deemed disposition
The other issue is that many gold holders never sell their gold at all, and thus leave it to their children when they die. In such instances the Canada Revenue Agency has ruled that there is a deemed disposition of the gold upon death, and the beneficiaries have to pay taxes on the profits, even though there was no sale. That means if you are in this position, it may make sense to transfer the gold to your beneficiaries while you are alive, and arrange to pay the taxes on your gains yourself, so that your beneficiaries are not burdened with figuring out how much tax they actually owe.
The other key thing to remember says DeMone is to keep accurate records of all of your purchases and sales. That way no auditor can challenge your calculations. That applies to any or all expenses that you incurred while holding your gold, such as storage fees and insurance expenses, as these can be deducted when calculating your profits.
The bottom line is that job as an investor, is to make sure that government’s cut of your profits, is as small as possible. The best way to do that is to plan ahead.
For image use picture of Edward Kholodenko, President and CEO of Questrade Inc. (CNW Group/Questrade Inc ...)
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