2018 Tax Loss Selling - Tis the Season

Keyboard with word tax spelled out on blue keycaps

December is the ideal time of year to review your portfolio for securities that have dropped in value, and have a capital loss, which can then be sold and used against capital gains.

This approach is known as Tax-Loss Selling and is a legitimate way for investors to reduce their income taxes while rebalancing their portfolio. This strategy only works for securities owned outside of a registered account as TFSAs, RRIFs, RESPs, RRSPs, etc. don’t qualify. Before implementing such a strategy, there are some things you need to know.

Any security sold cannot be repurchased immediately as the CRA would disallow the loss if the same security was repurchased within thirty days or less, even if it was purchased in a different account or through your spouse. To compensate for this rule, a substitute security would be purchased for these thirty days so any gains can be captured during this period.

Even if you don’t have capital gains this year, you can carry them back three years and apply to gains you’ve already paid tax on, or you can carry them forward indefinitely.

If you are considering contributing securities in-kind that have a capital loss to your TFSA or RRSP, the capital loss cannot be claimed to offset a capital gain.

This rule is buried deep inside CRAs regulations and can easily be overlooked. It is more advantageous to sell the security to capture the loss, contribute the net proceeds and invest in a substitute security for the next thirty days.

Lastly, don’t forget to factor in the holidays at the end of the year and that most security trades do not settle for 3 days. A trade must settle this year in order to be used to be used for the current tax year. This means that the last day of the year to sell a Canadian security is Friday, December 23rd and Tuesday December 27th for a US security.

The Bottom Line

While it never feels good to have a security in your portfolio that has lost money, tax loss selling is a prudent tax strategy when done properly and should be periodically reviewed throughout the year and not just at year end. Feel free to contact one of our Wealth Consultants if you have any questions about your personal financial situation.

All examples are for illustrative purposes only and are not intended to provide individual financial, investment, tax, legal or accounting advice. This material is for general information and is subject to change without notice. Every effort has been made to compile this material from a reliable source. However, we cannot guarantee that information will be accurate, complete and current at all times. Before acting on any of the above, please make sure to see a financial professional for advice based on your personal circumstances.

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