The price of gold soared to new records recently, sparking another round of gold fever. Some people are investing in the precious metal to hedge against inflation. Others want to further diversify their portfolios, and still more simply want to make money off unwanted jewellery. Whatever the reasons, here are the federal income tax implications.
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The price of gold has been skyrocketing and gold fever is sweeping North America this summer.
With some investors concerned about stock market risk and safe fixed-income investments such as CDs, Treasuries, Savings Bonds and money-market funds yielding less than some investors want, despite the possibility of inflation, the idea of putting some taxable money in gold and other precious metals can sound appealing.
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Parties That Glitter |
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A recent, lucrative and popular variation of the cash-for-gold phenomenon is the Gold Party.
The concept is simple: Bring your unwanted jewelry to the host's home and get a free, no-obligation appraisal. If you choose to sell, you get cash, the buyer gets gold and the host gets a ten per cent commission on the value of the night's sales. Everyone appears to be a winner. That is until you consider the tax implications. And to do that you need to understand the difference between personal use property and listed personal property, or LPP. Generally, personal use property is any asset used mainly for the enjoyment of you and your relatives. These assets, which have value but are not used to earn income, include vacation homes, furniture, personal automobiles and boats. Selling or disposing of them can result in taxable capital gains. These gains are treated differently from profits generated by other capital property. With personal use property, both the proceeds and the ACB are deemed to be the greater of $1,000 or the actual proceeds. Example: You buy a personal use asset for $800 and later sell it for $2,000. You wind up with a taxable capital gain of $500 ($2,000 minus $1,000 times 1/2). Losses cannot offset gains from other capital property and may not be carried forward. LLP is a separate category of personal use property. Listed personal property includes:
What distinguishes LPP from other personal property is that it generally increases in value over time, while other personal property is likely to depreciate. |
From an investment perspective that makes sense -- you bought low and can sell high. But be cautious. In these cash-for-gold schemes, the investment axiom may turn into: you bought low now sell for than it's worth. Often a cash-for-gold scheme will pay you just 30 per cent of the metal's actual value.
If you are determined to add gold to your portfolio, talk to your accountant about the tax regulations. Canada Revenue Agency (CRA) has some very complicated rules on the taxation of profits from selling physical gold, as well as what you can and cannot do with fees related to the investments.
Generally, you can choose how you want the CRA to treat your gains or losses on the sale of commodities, including gold and other precious metals. For tax purposes, proceeds from dispositions can be treated as income or as capital gains.
If you choose the income option, all profits are taxable and losses can be used to offset any other income.
But most taxpayers opt to report gains from commodity transactions on capital account because only half the gain is taxed. In those cases, however, if you have a loss, it can be used only to offset capital gains, not against other income.
Warning: Once you choose a tax treatment, you must stick with it for all future commodity trades.
When you invest in physical gold, it's a good idea to shop around the right dealer with security arrangements that suit your tolerance for risk. Secure storage is often an issue for investors who physically own precious metals such as gold, silver, platinum and palladium.
A bank safe deposit box is a possibility, but it may be hard to find insurance and the bank might be closed on the day you want to sell the gold.
Alternatives include security facilities, think Brink's for example, that offer allocated or segregated storage of precious metals.
With allocated storage, the physical assets of all the customers are mingled and you get a certificate stating how much of the collective total is yours. That can work fine unless you want immediate delivery. It can take time to convert your share back into physical coins or bullion.
With segregated storage, you hold the title to the actual assets, which are identified as yours and are kept separate from everyone else's. Your coins or bullion can be delivered at any time.
If you took out a loan to purchase your gold investment, you may be paying interest as well as storage and maintenance fees. These costs cannot be added to the adjusted cost base (tax cost) of the investment to reduce a capital gain. Courts have ruled that cost is what you give up to acquire for an asset. It does not include expenses incurred to make the purchase or to store and maintain it.
If, on the other hand, you choose to report as income the gains from trading gold, other precious metals or other commodities, you can deduct interest and maintenance expenses.
You can also hold investment grade gold and silver bullion and coins in tax-deferred Registered Retirement Savings Plans and Tax-Free Savings Accounts. If you are uncomfortable with physical ownership, you can also include shares of an exchange traded fund (ETF) that tracks the value of gold or other precious metals.
Coins in your RRSP or TFSA must be produced by the Royal Canadian mint and be at least 99.5 percent pure, with value based solely on gold content. Some coins are not eligible and collectability does not factor in. Bullion bars must be produced by a refinery accredited by the London Bullion Market Association and bear a hallmark that notes the weight and purity of the bar, as well as the name of the refinery.
Gold prices can be highly volatile because they are driven heavily by speculation. For example, on one recent day, a benchmark contract jumped to as high as US$1,681.80 per troy ounce. Later in the day, it swung down US$40 to US$1,640, closing the day down 0.4%, or US$7.20 at US$1,656.20.
Before you take the plunge to expand your retirement or savings portfolio with gold, talk to your accountant and gauge your tolerance for the price unpredictability. Quick price changes may not suit you if you want to make withdrawals at fixed times. As well, take into account how likely you are to want to have quick access to the coins or bullion.
