Tax-loss promoting: Hold these 5 issues in thoughts

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Fairness markets are sharply down in 2022, so now is an effective time to take an in depth have a look at your portfolio to get a head begin on tax-loss promoting for the yr.

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Tax-loss promoting includes promoting investments with accrued losses at year-end to offset capital positive aspects realized elsewhere in your non-registered portfolio. Any internet capital losses that can’t be at present used could also be both carried again three years or carried ahead indefinitely to offset taxable capital positive aspects in different years.

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Listed below are 5 issues to remember in case you’re fascinated about doing a little tax-loss promoting. 

Thoughts the commerce deadline

To ensure that your loss to be obtainable for 2022 (or one of many prior three years), the settlement should happen in 2022. This yr, the commerce date should be no later than Dec. 28, 2022, with a view to full settlement by Dec. 30, as a result of Dec. 31 falls on a Saturday this yr.

Look out for superficial losses

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In the event you suppose your loser inventory could rebound within the months forward, chances are you’ll be tempted to promote it, understand the capital loss after which purchase it again once more to catch the restoration. The issue with doing so is that you would get caught by the “superficial loss” rule in case you purchase again too quickly.

The superficial loss rule applies if property (or an “equivalent property”) offered at a loss is repurchased inside 30 days, and continues to be held on the thirtieth day by you or an “affiliated individual.” An affiliated individual contains your partner or common-law accomplice, a company managed by you, your partner or accomplice, or a belief of which you, your partner or accomplice is a majority-interest beneficiary, corresponding to your registered retirement financial savings plan (RRSP) or tax-free financial savings account (TFSA).

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Underneath the principles, your capital loss will probably be denied and added to the adjusted price base (tax price) of the repurchased safety. Meaning any good thing about the capital loss can solely be obtained when the repurchased safety is finally offered.

Watch out for foreign money implications

America greenback is up almost 9 per cent in opposition to the Canadian greenback in 2022, so in case you bought securities in U.S. {dollars}, the achieve (or loss) could also be bigger (or smaller) than you anticipated as soon as you’re taking the foreign-exchange part under consideration.

For instance, let’s say Sam purchased 100 shares of a U.S. firm in January 2022 when the worth was US$100 per share and the U.S. greenback was buying and selling at $1.26. The worth of the shares has now fallen to US$95, and Sam decides he desires to do some tax-loss harvesting to make use of the US$500 accrued capital loss in opposition to positive aspects he realized earlier this yr.

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Earlier than realizing if this technique will work, he’ll have to convert the potential U.S. greenback proceeds again into Canadian {dollars}. If the alternate charge immediately is US$1 equals $1.37, promoting the U.S. shares for US$9,500 yields $13,015. There’s a capital lack of US$500 (US$9,500 minus US$10,000), however there’s a capital achieve of $415, calculated because the Canadian greenback proceeds of $13,015 much less the Canadian-dollar-adjusted price base of $12,600 (US$10,000 instances 1.26).

If Sam had gone forward and offered the U.S. inventory, he could be doing the alternative of tax-loss promoting and accelerating his tax invoice by crystallizing the accrued capital achieve in 2022.

Don’t contribute in-kind

In the event you’re satisfied a selected inventory or safety you personal could also be at present underwater however has vital long-term potential, chances are you’ll be tempted to switch it with an accrued loss to your RRSP or TFSA to comprehend the loss with out really disposing of the funding. Be warned this loss is particularly denied underneath our tax guidelines.

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As an alternative, think about promoting the funding with the accrued loss and, when you have the contribution room, contributing the money from the sale into your RRSP or TFSA. Then, in case you are prepared to attend at the very least 30 days to keep away from the superficial loss rule mentioned above, you may have your RRSP or TFSA “purchase again” the funding.

You’re taking some danger in that you simply’re out of the place for these 30 days, however you need to use your capital loss and luxuriate in any future, long-term appreciation.

Use this spousal loss trick

Canada’s tax guidelines don’t enable spouses or common-law companions to file a joint return, however there should still be a approach for one partner or accomplice to make use of the opposite’s losses.

Think about the next situation: Jill inherited some ABC Inc. shares years in the past that now have an accrued capital achieve of $10,000. She has no capital losses to shelter these positive aspects ought to she promote the shares.

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Nonetheless, her husband Jack has a portfolio that sharply declined in 2022 and finds himself sitting on $10,000 of losses on his XYZ Corp. shares, which he initially acquired for $50,000 however at the moment are price $40,000. Sadly, Jack has no different positive aspects this yr nor did he have any positive aspects within the prior three years that might be offset by this $10,000 loss.

Suppose Jack sells the XYZ shares on the open market and receives $40,000. The identical day, Jill buys $40,000 of XYZ shares. Consequently, Jack’s loss will probably be deemed superficial since Jill acquired the shares inside 30 days of his disposition. Meaning the superficial lack of $10,000 is added to the adjusted price base of Jill’s shares, bringing her new tax price as much as $50,000 ($40,000 plus the $10,000 superficial loss).

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If Jill now waits 30 days earlier than promoting (assuming no additional market declines within the worth of XYZ inventory), she’s going to understand a capital lack of $10,000 (proceeds of $40,000 minus her adjusted price base of $50,000), which might then be used to offset the accrued achieve of $10,000 when her ABC shares are offered.

This technique was blessed by the Canada Income Company in a 2003 technical interpretation.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. [email protected]

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