Jared Burns, CPA, CA
December 3, 2022
Down markets are never pleasant. Triggering capital losses to reduce your tax bill can be seen as a silver lining.
The best part of a roller coaster ride to me, is the slow climb up the steep slope, you can hear the gears clicking to pull the train of thrill seekers to the top. After that most of it is a bit of a blur and honestly, I’m less of a fan. Up, down, side to side, no real idea what direction is next. A lot like the current securities markets. With all the turns and curves it’s easy to forget to be mindful of possible tools, like tax loss selling.
It’s been a long while since we had to consider extended losses in our securities holdings. That is why it’s important to look at your investments with your advisor and see if you should be triggering some capital losses to help reduce your tax burden. Here are three (3) things you need to consider when harvesting losses with your investment accounts.
1) Triggering losses are for non-registered accounts.
Many people forget that when it comes to their registered accounts (RRSP, TFSA etc) there is no need to trigger losses. All growth in these accounts accumulate tax free therefore you do not have access to tax losses. You can’t get your cake and eat it too. But, for your non-registered accounts, your tax losses can be used against other gains in the year, carried back against prior gains for up to three years or carried forward indefinitely to offset taxable capital gains down the road. It is generally always best if you can go back and apply losses to previous gains from the prior three years. This is because they will expire if not used and it puts refund money in your pocket right away. Money today is worth more than money tomorrow especially at current inflation rates. You will need to file an amendment to your T1. Talk to your accountant to get this done if you’re unsure.
2) You must make an actual disposition and it must be done in time
This sounds simple, but you need to have relinquished your security and received proceeds from the disposition. This concept of disposition is critical in our next point “stop loss or superficial loss rules”. The date that CRA counts for the sale to have taken place is what is called the settlement date. This is after the trade date as a day or two are required for the trade to be processed and funds or new securities to be in your account. This means you will need to ensure all your trades for realized losses need to be initiated by December 28th at the very latest.
3) Stop loss and superficial loss rules
One purpose of stop loss rules is to remove the ability of a taxpayer to create a capital loss that they can apply against a capital gain without changing their economic situation. If you sell your security and buy something that is practically the same (the term for this is identical property) then CRA may say that you never actually disposed of anything, you just shuffled the same cup around, therefore no capital loss available. Once you do have an actual disposition you or anyone affiliated with you (spouse, common law, a company you control for example) cannot buy that same or identical security again for 30 days. If they do you will not be able to benefit from applying the loss against other capital gains. The stop loss and superficial loss rules can become fairly complex, so it’s always good to check with your accountant to make sure you don’t get hung up by them.
Down markets are never pleasant. Triggering capital losses to reduce your tax bill can be seen as a silver lining. Just make sure you follow the rules and do it on time.
Author:
Jared Burns CPA, CA is the Director of Estate and Tax Planning with Louisbourg Investments. Submit your comments to jared.burns@louisbourg.net.
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This writing is for general information purposes only. It is not intended to provide legal, accounting, tax or financial advice. For complex matter you should always seek help from a professional. Any opinions expressed are my own and may not reflect those of Louisbourg Investments.