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 The
Money Management Newsletter: General
Interest
New rules allow unused capital gains balance
to be offset retroactively
By Rob Whipp
Money Management Newsletter - March 1997
I came across some information that will be of great
interest to executors
who have had to deal with taxable capital
gains for estates
after 1994 where mutual
funds were involved. This would also be of interest to anyone who
has sold all the units of mutual funds after filing the election form
with their 1994 return.
As you probably recall, investors who owned mutual funds
on February 22, 1994 were eligible to file form T664. This form, "Election
to Report a Capital Gain on Property Owned at the End of February 22,
1994", was used to claim the unused portion of the $100,000 capital
gains exemption for the 1994 taxation year.
Under the original rules, the election created an Exempt
Capital Gains Balance (ECGB) for each mutual fund that could be used to
reduce the capital gains liability that would flow through to the investor
by way of T-3 slip from the fund company. It could also be used to offset
the capital gains realized on the sale of fund units. If all units of
the fund were sold, any unused portion of the exempt balance disappeared.
The ECGB could not create or increase a capital
loss.
However, new rules were announced on June 20, 1996 that
dictate that any unused balance in a fund's ECGB can be used to increase
the adjusted cost base (ACB) of the last units sold of the fund. This
will either reduce the capital gain or create or increase a capital loss
which can then be used to offset other taxable capital gains. The change
is retroactive to 1994 and later years.
For example, an investor owned units of a mutual fund
which had an ACB of $60,000 on February 22, 1994 and had not used any
of his or her $100,000 capital gains exemption. Suppose also that the
fund was worth $110,000 at that time and when the election was filed,
it therefore created an ECGB of $50,000 (110,000 - 60,000). Now suppose
that the investor passed away or sold the fund in 1995 and at the time
of the disposition the investment was worth $90,000 (remember how the
market fell in 1994).
Under the original rules, a capital gain of $30,000
(90,000 - 60,000 ACB) would have been realized and would have been sheltered
from capital gains tax because the ECGB was $50,000. The remaining $20,000
of the ECGB would have been lost because all units were sold.
The new rules now permit recalculation of the transaction
by increasing the amount of the original $60,000 ACB by the amount of
the $50,000 ECGB to a new ACB of $110,000 thus creating a capital loss
of $20,000 on the transaction (90,000 - 110,000). This capital loss can
then be used to offset taxable capital gains on other investments.
So, if an estate or investor had large capital gains
liabilities on other investments in 1994 or 1995, and also had mutual
fund dispositions, the applicable returns can now be recalculated and
some of the taxable gains possibly offset.
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