Tax-Loss Selling – Capital Gains and Losses
With tax season in full swing, there are always lots of questions around different strategies that can help investors reduce their tax bill. Tax-loss selling is one of those strategies. What is it? and how do you take advantage of it? First, we need to understand capital gains and losses.

What is a capital gain or loss on an investment?
In simple terms, a capital gain or loss is the difference between the purchase price and the sale price of an investment. If you sell the investment for more than what you bought it for, it is considered a capital gain, if the value is less than what you bought it for it is a capital loss.

What are the tax implications of  capital gains or losses?
If you sell an investment and end up with a resulting capital gain, (you made money), you must pay taxes on that capital gain. Currently you include half (50%) of the gain in your income and pay tax at your marginal tax rate. If you have lost money; you have a capital loss; a capital loss can be written off against your capital gains to reduce the amount of tax you owe on the money you made. Capital losses can only be used to reduce your capital gains, but you can carry them back three years to offset previous taxes paid; or carry them forward indefinitely to offset tax on future capital gains.

Tax Loss Selling Strategy
Considering the current market conditions this might be the perfect opportunity for investors to take advantage of this strategy. By selling or switching certain investments that have fallen below what you originally paid for them, you can offset any capital gains you incurred this year (or the previous 3 years) or crystalize the loss and carry it forward indefinitely. Only losses incurred on non-registered investments qualify, so if the investment is inside one of your registered plans RRSP/RRIF/LIRA/LIF/TFSA) you cannot use it for a tax loss.

Can You Sell and Then Repurchase the  Same Investment?
The CRA does not want people to be artificially creating capital losses for themselves to be used to offset capital gains. Briefly, the superficial loss rule states that if an investment is sold at a loss and repurchased by the taxpayer (or their spouse) within 30 days, the loss will not be allowed for tax purposes.

Can You Avoid the Superficial Loss Rule?
Yes.Say you own a Canadian Equity Fund that has plunged in value because of the Covid-19 sell-off. You can switch the money into another Canadian Equity Fund keeping your money invested and in position to take advantage of the expected market recovery when it comes.

Transfers In-kind to an RRSP or TFSA
Sometimes we transfer investments into our RRSPs to create our contribution receipt, or into our TFSA to shelter future gains from tax. However, keep in mind if the investment is in a capital gain position when to transfer it, you will have to pay tax on the gain – same as if you sold the investment outright. Unfortunately, a transfer of an investment in a loss position will not create a usable capital loss to be used in the future. Therefore, to crystalize the loss you would sell the investment and transfer the cash into your RRSP/TFSA then re-purchase a similar investment within the registered account.

For more information on this strategy or to see if one of your investments qualify do not hesitate to contact me.

Tracey

Source: Dynamic Funds,MT 2017-04-05,article by John Heinzl, Investment Reporter published 11-28-14 updated 05-12-18