Don't forget tax rules during gold rush
As the price of gold continues to skyrocket, soaring above US$1,200 per ounce, gold fever is sweeping the nation this summer.
Just look at the extraordinary number of “cash for gold” shops that have opened their doors across the country in the past year, sparking intense competition and in one Toronto neighbourhood, prompting a bizarre alleged murder plot between rival gold buyers.
With all this gold hype, the temptation to buy, sell or invest in gold has never seemed greater. But be careful, as the tax rules governing the profit and fees associated with investing in actual gold can be complicated.
Last week, the Canada Revenue Agency issued some guidance on how interest expenses incurred to finance the purchase of gold and maintenance costs to store the gold should be treated for tax purposes.
As a general rule, the CRA allows you to choose how you want your gains and losses on the sale of commodities, including gold, to be treated for tax purposes: on an “income” or “capital” account.
Taxpayers who choose to report on income account include any profits from sale as income. Consequently, if they experience a loss from the sale of the commodity, that loss can be used to offset any source of income.
Most taxpayers, however, choose to report gains from commodity transactions on capital account, since only 50% of a capital gain is taxable. Of course, by doing so, any losses on the sale of commodities must be treated as capital losses, which can only be used to offset other capital gains.
One caveat: Once you’ve chosen either income or capital treatment, you must follow this method consistently for all future commodity trades.
In the CRA update, a taxpayer purchased gold hoping to realize a profit on the eventual sale, which would be reported on capital account.
The taxpayer incurred maintenance costs and interest expenses associated with the gold purchase and inquired whether such costs could be added to the adjusted cost base (ACB) or tax cost of the gold investment, which would have the effect of reducing the capital gain upon eventual sale of the gold.
In defining cost, the courts have established in prior cases that “cost is the price that the taxpayer gave up in order to get the asset; it does not include any expense incurred in order to pay that price or to keep the property afterwards.”
In other words, the interest expense on money borrowed to buy the gold, as well as the maintenance costs to hold the gold, cannot be added to the ACB of the property.
On the other hand, if the gold investor chose to report the trading profit on income account, both the interest and maintenance fees would be deductible as expenses.