Tax Loss Selling is a Canada Revenue Agency sanctioned strategy to reduce capital gains taxes. Securities are sold that incur a capital loss, which is then used to offset taxable capital gains. Any losses must first be applied the current tax year, then unused losses can offset gains in the previous three years or carried forward indefinitely. Tax Loss Selling is applicable to only non-registered investments.
The deadline to execute a trade for the 2021 tax year is December 29th.
What You Need to Know
Tax Loss Selling is a strategy that should be utilized when you have investments that have lost value and are not predicted to recover in the very near future, and you have had capital gains recently or anticipate them in the future. The intention is to reinvest the funds generated from the sale, and their destination should be determined at the time of the sale so that a new purchase can be made when most appropriate.
The new investment must be truly different from the vehicle that is sold. Similar mutual funds or ETFs from different fund companies could be considered as “same securities” if they have the same investment mandate. If the difference is not distinct, the transaction will be classified as a “superficial loss” and the deduction will be disallowed by CRA. Penalties and interest will likely also be assessed.
You must also wait to employ this strategy. Investments that you have purchased 30 days prior or re-purchased 30 after the sale, run afoul of Canada Revenue Agency’s strict rules for this strategy. Also, avoid investments from someone who is considered to be an “affiliated person” to you.
When working with registered investments, Tax Loss Selling is not a workable strategy. Any shares that are moved into a registered account are deemed to have been transferred at Fair Market Value. This could result in a capital gain, and CRA does not allow any capital losses to be claimed against gains for registered investments. Depending on your circumstances and plans, it may be best to sell the shares outside of the registered account and use the loss, and then contribute the cash to a registered investment. A purchase of a similar security inside the registered account could occur after waiting at least 30 days.
To be utilized in the current year the trade must be settled on or before December 31st. Based on the number of days needed to settle a trade, the last day to execute a trade this year is December 29th. Any losses incurred through trades on December 30th or 31st will settle in January and will be counted, initially, toward the 2022 tax year.
The end of the calendar year may provide the incentive needed to sell some stocks that could have or should have been sold earlier. Tax Loss Selling is one way to do what needs to be done.
If you have questions about financial planning in Calgary and wealth management in Calgary or would like to explore your options, connect with us to speak with a financial advisor in Calgary and get the answers you need to achieve your goals.
Information contained in this publication has been compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made by MRG Wealth Management Inc., or any other person or business as to its accuracy, completeness, or correctness. Nothing in this publication constitutes legal, accounting or tax advice or individually tailored investment advice. This material is prepared for general circulation and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. This is not an offer to sell or a solicitation of an offer to buy any securities.