Reviewing your portfolio and taking a look at what gains you’ve seen and how you might be able to offset them with any losses should be part of your year-end tax planning.
Kris Kibler, tax planning lead at Wealthsimple, says if you are selling shares at a loss, that deficit can be used to offset capital gains on better performing stocks, reducing the amount of tax you will owe.
He explained that if you bought shares for $10,000 and later sold them for $7,000, the $3,000 capital loss could be deducted against capital gains.
That deduction will reduce the amount of tax you might owe when you file your return next year.
Kibler says it is important that tax-loss selling isn’t done in a vacuum.
“You don’t necessarily engage in tax-loss harvesting or tax-loss selling in order to just take advantage of the tax implication with disregard for the investment portfolio overall,” he says.
“This always wants to be kind of done in tandem with your overall investment and financial plan as a whole.”
It is also important to ensure you don’t run afoul of the rules governing what losses you can claim.
Which accounts does tax-loss selling apply to?
Tax-loss selling only applies to taxable or non-registered accounts. Losses in accounts such as your TFSA, RRSP or RESP cannot be used to offset your taxable gains outside those accounts.
The losses can only be used to offset any taxable capital gains you have. They can’t be deducted from your regular income. If you don’t have any capital gains to offset this year, your losses can be used to reduce your taxable capital gains going back three years or you can carry the losses forward to use in future years.
CRA also doesn’t allow what is referred to as a superficial loss, which prevents you from claiming the loss if the same or identical security is repurchased within a 61-day window starting 30 calendar days before the sale and extending 30 days after the sale.
The superficial loss rules don’t just apply to your account, but also extend to your spouse or common-law partner, corporations you or your spouse control, or what the CRA calls an affiliated person.
“What the CRA doesn’t want you to do is get the advantages of the tax-loss harvesting or tax-loss selling strategy in order to get the benefit and then purchase the exact same securities again and continue in the same portfolio,” Kibler said.
Tax-loss selling can be helpful, but it’s not an investment strategy
Julie Petrera, director of financial planning at Edward Jones, says it is important to remember that tax-loss selling is not an investment strategy.
“It should support your long-term goals but not drive your long-term investing goal,” she said.
“I wouldn’t make decisions on what I’m holding in my portfolio just for short-term tax reasons.”
