When an individual, a new company or a stock portfolio first start paying taxes, we have cause for celebration! Bragging rights at cocktail parties. Somewhere down the road, paying taxes becomes burdensome to the individual and the company and a drag on growth of the portfolio. More bragging rights, not much consolation.
We are taxed each year on our career income, on rental income, on any interest earned and on dividends produced by assets held outside tax-advantaged accounts. If the fair market value of an asset is greater than the purchase value (adjusted cost base), and hopefully it is, we have a capital gain on our hands. Capital gains are taxed when the asset is sold or at the taxpayer’s death.
(Follow this article for a solid read on US estate tax as it applies to Canadians.)
Now, as soon as an investment held outside a tax-advantaged account increases in value, we have a tax liability in the form of a capital gain. Note again that it does not need to get paid until the investment is sold. Can we consider that to be a loan from the government? An interest-free loan with no due date? Could you get it from a bank?
The sort of loan you got from your parents when you were in high school? Could such a take on portfolio capital gains taxes be correct view?
Any borrowing to invest such as margining an account is dangerous most of the time. That does not apply to deferred tax liabilities (DTL). Quite the opposite, they are attractive, indeed. They allow investors to control more assets for longer periods. DTLs are effective only if we don’t trade. Avoiding trading is another habit that highly effective do-it-yourself investors practice.