If you’re an investor who has incurred capital gains from the sale of an asset, you may be looking for ways to reduce the taxes owed. One such strategy is “Tax-Loss Selling” or Harvesting, which involves selling investments that are trading below their original cost in non-registered accounts and using the subsequent capital loss to offset any capital gains incurred that tax year. This strategy can be applied to a variety of investments, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and cryptocurrencies.
In this blog post, we’ll explore the concept of tax-loss selling in Canada, including the rules to follow when implementing this strategy, the benefits of carrying capital losses forward or backward, and the Superficial Loss Rule. We’ll also provide examples of how to use tax-loss selling to defer taxes on your taxable capital gains and enhance your bottom line.
Let’s first discuss the concept of capital gains and losses:
Capital gains are the profits you make when you sell an asset for more than you paid for it. For example, if you bought a stock for $100 and sold it for $150, you would have a capital gain of $50. Capital gains are taxable in Canada, but only 50% of the gain is included in your taxable income. This means that if you made a capital gain of $50, you would only have to pay tax on $25 of that gain.
Capital losses, on the other hand, occur when you sell an asset for less than you paid for it. For example, if you bought a stock for $100 and sold it for $80, you would have a capital loss of $20. Capital losses can be used to offset capital gains. If you do not have capital gains, you can carry your losses backward for up to three years or forward indefinitely and apply them to different years’ returns. Let’s look at a few examples: Assume you had a capital gain of $50 and a capital loss of $20, you would only have to pay tax on $15 of the gain ($50 - $20 = $30, and 50% of $30 is $15). Using the same example, if you had a capital gain of $0 and a capital loss of $20 in the current year, you would have a net capital loss of $20. You can carry this loss back to any of the three preceding years to offset your taxable capital gains in those years.
When an investor sells an underperforming investment that they believe will continue to underperform, they can use the capital loss to offset capital gains and reduce their tax bill. There are also other reasons why an investor might sell their underperforming portfolio. For example, they may want to free up cash to invest in a more promising opportunity, or they may want to rebalance their portfolio to align with their investment goals. One important point to keep in mind is the “Superficial Loss Rule”.
The Superficial Loss Rule is a provision in the Canadian Income Tax Act that prevents the selling and trading of losses between Canadian taxpayers. A superficial loss is a capital loss that the Canada Revenue Agency (CRA) does not allow you to claim because the loss did not occur from an independent arm’s length transaction and can be deemed as a way to avoid taxes on your capital gains. The rule applies when a taxpayer disposes of capital property and buys or has the right to buy the same or identical property within a period that begins 30 calendar days before the sale and ends 30 calendar days after the sale.
Let’s assume an investor bought 100 shares of ABC Corporation for $10,000. A few months later, the value of the shares has declined to $8,000, and the investor decides to sell them, realizing a capital loss of $2,000. If the investor buys back the same 100 shares of ABC Corporation within 30 days of selling them, the loss would be considered superficial. However, if the shares were bought back 31 days after selling them, the loss would not be considered superficial.
The deadline for tax loss selling in Canada is December 27, 2023. This means that if you sell at a loss on or before that date, you are able to deduct your loss against your 2023 capital gains. Stocks purchased or sold after this date will be settled in 2024, so any capital gains or losses will apply to the 2024 tax year. The reason why the deadline is December 27 is because sales of securities must settle within the calendar year in order to offset capital gains realized in the same year (or previous three years). 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.
For further information please contact Taxtron Support at 416-491-0333 or visit www.taxtron.ca
Posted on 22 December 2023