We often hear, “it’s not what you make, it’s what you keep”. And part of maximizing your long-term returns involves minimizing the taxes you pay. An important strategy that prudent investors begin looking at towards the end of the year is tax-loss selling (tax-loss harvesting).
When it comes to selling investments, the old saying goes: buy low, sell high. Tax-loss selling is one of the very few reasons you might find it advantageous to sell low. This strategy allows you to minimize or eliminate the capital gains tax you pay after selling certain investments at a profit. Among other things, these include mutual funds, stocks and real estate (other than your personal residence).
In Canada, when an investment is sold at a loss, that loss can be applied to offset capital gains realized on the sale of other investments. The loss must first be applied against capital gains that were realized in the current year. If the loss is greater than the gain, the excess loss can be carried back and applied against capital gains made in the prior three years. And if there weren’t any, it can be carried forward to be applied against capital gains in future years.
Let’s take a look at an example of how it works: Assume an investor purchased 100 shares of ABC Corp. at $40 (inclusive of brokerage fees). The total investment would be $4,000. If they sold the shares in 2018 for a net total of $20 per share, the investor would receive $2,000. The difference between the purchase and sale amounts would result in a capital loss of $2,000. This loss can be used to reduce certain capital gains this year by $2,000. If there are no applicable capital gains this year, then the $2,000 capital loss can be applied against capital gains accrued in the last three years, resulting in a tax credit or refund.
It’s important to note that capital-loss selling cannot be applied to registered accounts like RRSPs, RESPs, RRIFs, or TFSAs, and that capital losses will be foregone if you transfer a losing position from a non-registered account into a registered one. Additionally, if you are selling an investment at a loss, you (and your spouse/common-law partner) must wait at least 30 days before repurchasing the same securities, regardless of account. If you repurchase the shares within a 30-day window, CRA will determine that the trade was a “superficial loss” and you will be denied the benefits of the transaction.
But what if an individual wants to remain invested while still taking advantage of the loss on a stock? Say you own a bank stock that's down since you bought it. You want to trigger the capital loss, but at the same time you think the banking sector has a strong outlook and you want to keep the money at work. One solution is to sell the stock and then immediately purchase a different bank, or purchase several bank stocks in a bank sector exchange-traded fund (ETF). By doing this, you’ll get the capital loss to offset capital gains, not have a superficial loss, and also stay invested.
If you are selling securities at a profit in 2018, consider whether it is prudent for you to realize your capital gains this year or next. And remember, selling an investment simply to take a loss should never be your sole motivation. It’s important to take into consideration the merits of the investment, its long-term prospects, how it fits into your portfolio and, of course, your overall investment objectives.
As always, be sure to seek out guidance from your financial advisor or accountant to make sure the strategy works for you.
Mark Shimkovitz is a Financial Advisor with Raymond James Ltd. Information provided is not a solicitation and although obtained from sources considered reliable, is not guaranteed. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The view and opinions contained in the article are those of the author, not Raymond James Ltd. Raymond James Ltd., member of Canadian Investor Protection Fund.
Thursday, December 27, 2018
Last day for tax-loss selling for Canadian taxpayers selling Canadian equities. There are virtually no alternatives if you leave trades beyond this date.
Thursday, December 27, 2018
Last day for tax-loss selling of U.S. equities for Canadian taxpayers. Once again there are no alternatives should you wait beyond this date.