Tax loss selling – Smart strategy to reduce your capital gains this year

November 2014

    

Each year, whether in bull or bear markets, volatility presents investors with tax loss selling opportunities. If you’ve realized capital gains in the year, consider selling assets with an accrued loss to offset the gains. You may also realize the loss if you’ve had capital gains in the last three years that weren’t offset by your capital gains exemption.   

Things to consider:

Future capital gains
Consider incurring a capital loss now and carrying it forward for future years. However, be aware that in carrying forward the loss, time erodes the value of the unused loss. If the capital gain occurs too far in the future, time may have eaten away much of the capital loss’ value.

 

Foreign exchange gains / losses
In addition to the fluctuation in the price of a security, you should consider the impact of fluctuating foreign exchange rates as the value of the Canadian dollar fluctuates daily against foreign currencies. You must calculate the cost of your investment in Canadian dollars using the foreign exchange rate in effect on the date you purchased the investment. Similarly, you must calculate your sales proceeds in Canadian dollars using the rate in effect the day you sell your investment. The difference in Canadian dollars represents your loss or gain in the investment.

Sale and reacquisition of investment
If you are currently holding a security that has lost value but see a strategic benefit to holding the security long term, you could consider selling it to realize the capital loss and then reacquire and enjoy the long term benefits of that same investment. However, you will want to avoid reacquiring the investment in a situation where tax law deems the capital loss to be nil (see below).

Sale to family or others
Consider selling your investment to family members or to your corporation and not into the market,  if  you want to create a capital loss for yourself and, you want your family or you, through your corporation, to enjoy the benefits of what you see as a good, long-term investment. As above, you will want to avoid the sale of an investment to a family member or your corporation where tax law deems you capital loss to be nil. 

Cautions

Superficial loss

  • The Superficial Loss Rule deems the loss to be nil if you or a person affiliated to you purchases an identical investment within 30 calendar days before or after you sell the investment. 
  • The Rule also applies if the reacquired investment is not the same as the original investment, but is highly similar to it.
     

Please note that in order for a disposition of marketable securities in an open market to be included in your 2014 tax year, the securities must be sold before the exchanges last trading day for settlement in 2014. For Canadian exchanges, which are closed December 25th and 26th, the last trading day for tax loss selling is Christmas Eve, December 24th, before market closure at 1pm, for settlement December 31st. For U.S. exchanges, the last trading day is Boxing Day December 26th, full day for U.S. Markets, for settlement December 31st.

    

In view of the complexity of the rules, you should obtain tax advice from a tax specialist before proceeding. For more information or to receive our complimentary articles on Advanced Tax Loss Selling and Tax Loss Selling, please contact your Richardson GMP Investment Advisor. 

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