Brendon Saxton BA, PFP®, CFP®
As of the beginning of October, the S&P/TSX is down approximately 9.5% for the year. Before the year winds down, and we turn our attention to spending time with friends and family over the holiday season, this is a good time to consider strategies like tax-loss selling for your non-registered investment portfolios.
Tax-loss selling involves selling an investment that has decreased in value to offset a capital gain on an investment that has increased in value. This strategy is an excellent opportunity to use those investments that are expected to underperform to offset realized capital gains before the market rebounds.
A capital gain is the increase in the value of an investment such an equity, mutual fund, exchange traded fund or real estate and a realized capital gain is when the investment is sold at a higher value, locking in the gain and thereby making it taxable.
Of particular interest, the realized capital gain that you are attempting to offset does not need to occur in this calendar year, as the Canada Revenue Agency (CRA) allows you to carry net capital losses back up to three years or carry them forward indefinitely. Therefore, you can take advantage of investments that are expected to underperform in your non-registered portfolio this year, to offset previous or future gains.
Tax-loss selling rules
There are some rules that guide the use of tax-loss selling. First, any gains triggered in the current year must be offset first before carrying the realized capital loss back or forward. Second, you cannot trigger “superficial losses,” which the CRA defines as those losses that occur by you or a person affiliated with you selling and then re-buying the “same or identical” property 30 days before or after the sale. Superficial losses would include trades in registered or non-registered investment accounts controlled by yourself or by a person affiliated with you. A person affiliated with you would include but not limited to a spouse, common law partner, trust or corporation.
The risk is that you will be out of the market and unable to participate in any income, dividends or gains you would otherwise have earned during the 30-day period. Alternatively, you could consider purchasing a similar investment, for example purchasing a different mutual fund with similar attributes. There could also be costs to buy and sell securities.
As with any investment or tax strategies your Edward Jones Advisor working with your tax professional can create a strategy tailored for you and your future.