Tax "Loopholes"

Here's a little-known tax fact: most tax loopholes are intentional, created by the Ministry of Finance to stimulate certain sectors of the economy.

For example, if your employer buys a $30,000 car on Dec. 31, you can write off half a year's depreciation, or $4,500, even though this new asset was held for only one day. This is no oversight. More likely, it's an incentive for businesses to purchase cars.

In contrast, true tax loopholes are unintentional benefits you find only by reading between the lines of the Income Tax Act. For example, consider the tax-saving opportunity that presents itself if your spouse has losses on investments and you have gains:

Shifting Capital Loss From One Spouse to Another

Imagine Susan is sitting on a capital loss this year, while her husband, Tim, realized a capital gain. According to the letter of the law, Tim cannot use Susan's loss to offset his gain. He will have to pay tax on his gain, while Susan's loss remains unused until she can apply it to a future capital gain of her own.

By reading the Income Tax Act closely, there is a solution. To share a capital loss with her husband, all Susan has to do is sell her losing shares to Tim, allowing him to claim the loss as his own. Let's explain.

We'll assume that Susan's shares originally cost $10,000, but are now worth $1,000 – a potential loss of $9,000. She sells the shares to Tim at the fair market value of $1,000, then elects on her income tax return not to have the transaction occur at cost.

This allows her husband, as the purchaser of the shares, to add the $9,000 capital loss to his adjusted cost base for tax calculation purposes. Now Tim owns shares with a fair market value of $1,000 and an adjusted cost base of $10,000.

The final step is for Tim to simply sell the shares. The $9,000 loss goes on his books, not Susan's, because he bought the shares from her at fair market value.

While this may sound complicated, it really isn't in practice. Keep in mind, however, that this loophole applies only to spousal transfers of capital property. In other words, it won't work if you sell losing shares to another family member or a friend.