Tax Tip Thursday

I want to talk about something that will be of interest to people with investments and/or investment properties, especially given the current economy and market conditions.

Tax Loss Selling

Tax-loss selling, also known as tax-loss harvesting, is a strategy available to investors who have investments that are trading below their original cost in non-registered accounts. These investments could be stocks, bonds, mutual funds, and/or exchange-traded funds (ETFs).

The strategy involves selling these investments and using the subsequent capital loss to offset any capital gains incurred that tax year. It’s also possible to carry capital losses back into the previous three tax years and/or carry them forward indefinitely. Sales of securities must settle within the calendar year to offset capital gains realized in the current year.

Remember, settlement dates are typically two business days after a sale is initiated, so the last day to tax-loss sell will typically be at least two days before the last day of December, so don’t leave it until the last minute! Another thing to keep in mind is that you are not the only one doing this and the market pricing can be affected by the volume of sell-off.

Why is this relevant?

A lot of people have sold 2nd properties in the last year or two. As a result, they are facing capital gains and the associated taxes (or may have already paid them). While capital gains are one of the best deals going in our tax system, you still have to pay tax. If you are one of the people that sold off property and have generated a taxable capital gain, AND you have other investments (stocks, bonds, ETFs) in non-registered investments, AND their value has dropped, you may want to consider this strategy before year-end.

This would allow you to apply your losses on your investments against the capital gains from the sale of property (or other investments). This applies to the 3 years previous as well. If you had capital gains in 2020, you could apply these losses to those gains by way of carry back and receiving the tax benefit early in 2023.

One thing to be careful of is the superficial loss rule. If you are thinking that you can just turn around and rebuy the stock, think again, there are some rules.

The Superficial Loss Rule

When you sell an investment and trigger a capital loss, the superficial loss rule states that you can NOT deduct the capital loss if you buy (or purchase a right to buy) an identical security within 30 days of the settlement date of your sale transaction. This means you can’t purchase the security 30 days before or 30 days after your settlement date. Violating the rule means your tax benefit would effectively be canceled. The rule also states that “affiliates” can NOT make a purchase.

The Canada Revenue Agency provides the following examples of affiliates:

• you and your spouse or common-law partner;
• you and a corporation that is controlled by you or your spouse or common-law partner;
• a partnership and a majority interest partner of the partnership; and
• a trust and its majority interest beneficiary (generally, a beneficiary who enjoys a majority of the trust income or capital) or one who is affiliated with such a beneficiary.

The last consideration is registered versus non-registered investments. The 2 must not meet when it comes to tax loss selling.

If you have TFSA/RRSP accounts, do not transfer stock from a non-registered account to your registered accounts (TFSA or RRSP). The loss will be denied. Sell the stock in the NON-Registered account and then make a cash contribution to the TFSA or RRSP and DO NOT buy the same stock within 30 days.

In Summary

I am not offering a stock sale or purchase advice, nor recommending everyone go out and sell their loser stocks. This is primarily a strategy of timing more than anything else, that will help you save some taxes potentially. Please consult with an investment advisor for specific investment advice. If you require assistance understanding whether this is a good tax strategy for yourself, please feel free to contact our offices and set up a meeting!

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.