TAX NEWS - June 2010

Canada Tax: You may have to pay capital gains tax when giving shares as a gift

Giving shares as gifts and disposing of worthless ones were among the topics raised in the latest batch of reader letters. Here's what they wanted to know.


Q: In 2007, I gave shares of BCE to family members and a friend. I thought that would be the end of it. Never did it occur to me that I might have to pay capital-gains tax. I got nothing in return for these shares. Now, I've been told by other people I should have reported the gifts and paid tax. I started working for Bell in the 1950s, began buying shares shortly afterward, and have no idea how to calculate my overall gain. What do you think I should do?

A: The others are right: Gifting is considered a disposition for tax purposes, and fessing up probably is the way to go. Doing nothing may cost you. Nick Moraitis of the accounting firm Fuller Landau says that, while the government may give a break on penalties if you amend the 2007 tax return voluntarily, "they will not be sympathetic if they find him first and find out he knew about the error and did nothing about it." That could mean penalties on top of compound interest. The gains apply only as of 1971 -just before capital gains were introduced.

"The shares had a value of $46.88 per share back then, based on a government publication, and this value becomes the cost," Moraitis said. "To that are added the dividends reinvested and additional shares bought from 1972 to 2007."

Contact your broker, the BCE transfer agent for shares, Internet dividend records, old investment statements and anything else you can find to help establish your real cost, or an approximation.

"Be prepared to support how you came to that amount when questioned by the tax authorities," Moraitis said.


Q: I have Nortel shares I know aren't worth much. I want to claim the loss for income-tax purposes. I brought the certificate to my brokerage in Montreal, but they won't process a trade. What should I do?

A: Jamie Golombek, managing director of tax and estate planning for CIBC Private Wealth Management, said that under the Income Tax Act, there is a specific election that allows you to claim a capital loss and report "zero proceeds" when a company goes bankrupt, has been wound up or is insolvent and ceased carrying on business.

"This is not yet the case with Nortel, which is currently restructuring and selling off its assets," Golombek said.

He suggests selling shares to a friend or family member other than a spouse or partner for $1, "being sure to draw up a purchase and sale agreement to evidence the sale in case Canada Revenue Agency should challenge you."