There is a silver lining to selling investments at a loss. By following a few basic rules, you can sell your investments that have declined in value, and pave the way to reduce some capital gains by taking advantage of a strategy known as tax-loss harvesting. Selling at an opportune time within your taxable accounts can have a meaningful impact on your capital gains taxes and increase your after-tax investment returns.
Tax-loss selling
Tax loss selling involves selling an investment that has decreased in value to offset a realized capital gain from a sold investment that increased in value. For example, if you sell an investment with a $10,000 taxable capital gain, you may be able to sell another investment to offset some or all of the tax you would be required to pay on that gain.
You could also sell assets in order to reclaim tax paid in the previous three calendar years, or to realize losses to carry forward into future years. To carryback a capital loss, you must complete Revenue Canada Form T1A – Request for Loss Carryback. You do not have to file an amended return for the year in which you want the loss applied. Speak with your tax professional for additional details.
Tax-loss selling rules
There are rules that guide the use of tax-loss harvesting. First, any gains triggered in the current year must be offset first before carrying the realized capital loss back or forward. For example, if you have a $10,000 capital loss and a $4,000 capital gain in the current year, the loss must first be applied to the gain, and the resulting net loss of $6,000 can then be carried forward or backward to other years. You cannot elect to pay taxes on the $4,000 gain and carry the full $10,000 loss to other years.
Once capital gains from the current year have been reduced to nil, it may be worth carrying the capital gain forward, particularly if you could have capital gains over $250,000 in a year in the future. This may be better than reviewing capital gains from previous years due to the change in the capital gains inclusion rate for the 2024 tax year.
Tax-loss selling 30-day rule: Superficial losses
The Government of Canada does not permit you to trigger superficial losses. According to the Government of Canada a superficial loss occurs when “you dispose of capital property for a loss and both of the following conditions are met:
- You, or a person affiliated with you, buys, or has a right to buy, the same or identical property (called “substituted property”) during the period starting 30 calendar days before the sale and ending 30 calendar days after the sale.
- You, or a person affiliated with you, still owns, or has a right to buy, the substituted property 30 calendar days after the sale.”
Rather than selling and waiting for 30 days following the trade date to re-purchase, another strategy would be to substitute an investment that provides similar exposure. For example, if you sold a US equity mutual fund and realized a capital loss, but still want to maintain the same exposure to US equities, consider purchasing US equity fund or exchange traded fund.
Affiliated persons
You or a person affiliated with you cannot buy the same or identical property for 30 days following the trade date. However, what is considered an affiliated person?
Some examples of affiliated persons include:
- your spouse or common-law partner
- your TFSA or RRSP (or other registered account)
- a corporation that is controlled by you or your spouse or common-law partner
- a partnership and a majority-interest partner of the partnership
- a trust and its majority interest beneficiary (generally, a beneficiary who enjoys much of the trust income or capital) or one who is affiliated with such a beneficiary
Additional considerations of tax-loss harvesting
A capital loss may also be denied on an in-kind transfer of an existing investment in a non-registered account to an RRSP or TFSA (or other registered account). Investors generally cannot claim a capital loss on an in-kind contribution. In order to create a capital loss, they would have to first sell the investment in their non-registered portfolio, and then make the RRSP or TFSA contribution with the cash proceeds from the sale. However, you (and affiliated persons, including your RRSP or TFSA) cannot re-purchase the same investment within the 30 days after the sale of the investment.
The risks of tax-loss harvesting
While tax-loss harvesting can be advantageous, there are risks.
These include:
- The fact that you (and affiliated persons) will not be able to hold the investment you have just sold for at least 30 days following the trade date, or any investment that is remarkably similar.
- If your intention is to repurchase the same investment after 30 days, you will be unable to participate in any income, dividends or gains you would otherwise have earned during the 30-day period.
- There could also be costs to buy and sell securities.
What’s unique for capital gains & losses in 2024?
2024 is treated as a transition year with two periods (period 1: January 1, 2024 – June 24, 2024, and period 2: June 25, 2024, to December 31, 2024). Taxpayers need to separately track gains and losses in each period. The net proceeds of gains and losses in the same period are reported for tax purposes.
All net capital gains triggered up to and including June 24th, 2024, are taxed at 50% of your marginal tax rate. Capital gains on or after June 25th, 2024, are taxed at 50% of your marginal tax rate up to $250,000. Capital gains over $250,000 realized on or after June 25th are taxed at 2/3rd of your marginal tax rate.
For example:
Taxpayer realizes a capital gain of $600,000 on June 1, 2024, a loss of $75,000 on July 25, 2024, and a Capital gain of $475,000 on October 1, 2024.
Period 1
(January 1st, 2024 – June 24, 2024)
Capital gain of $600,000 taxed at 50% inclusion rate so realized gain of $300,000.
Period 2
(June 25, 2024 – December 31, 2024) Gain of $475,000 less capital loss of $75,000 = Capital gain of $400,000
50% inclusion rate $250,000 and 2/3 inclusion rate for remaining $150,000.
= $225,000 realized capital gain for period 2 (1/2*$250,000 + 2/3*150,000)
Total realized capital gain for 2024 = $525,000 ($300,000 period 1 + $225,000 period 2)
After January 1st, 2025, Capital gains will be taxed at 50% of your marginal tax rate up to $250,000 with capital gains over $250,000 taxed at 2/3rds your marginal tax rate. Capital gains and losses are netted against each other to determine the total capital gain for loss for the year.
