We hear a lot about “tax-loss selling” around this time of year. That’s the tax technique of using investment losses against capital gains to cut your overall tax hit.
And with the big run-up of U.S. stock markets through 2013, investors may be looking for ways to do just that. But to get the full benefit of this strategy, you have to act before year-end. Here’s how it works.
Current Year Losses
If you had capital losses this year to offset your capital gains, the claim is mandatory. You must first of all claim any 2013 losses against 2013 gains. Remember, too, that use of tax losses to offset capital gains is not available in registered plans like RRSPs and TFSAs. The tax-loss selling technique works only for non-registered, non-tax-sheltered accounts.Losses Carried Back
You can carry unused capital losses back three years. That means if, after applying this year’s losses against this year’s gains, you still have losses left over (and you had taxable capital gains for the 2010 to 2012 tax years), you can carry back those losses to offset those previous years’ capital gains.This offset is optional, and you can choose the year to which you apply the losses. This is a truly lucrative tax break, which many investors tend to overlook.
Losses Carried Forward
If, for some reason, you still have excess capital losses after your “carryback,” don’t despair. You can carry capital losses forward forever. This means that if you still haven’t managed to generate gains this year and haven’t found any in the preceding three years, you don’t have to rush to go out and claim a tax loss. Tuck it away for that lucky day when you do actual have some capital gains to offset.Tax-loss Selling Deadline
To trigger a tax loss in 2013, your trade must actually “settle” by December 31. The settlement delay on Canadian stock exchanges is three trading days after the date of the sell order.So to be absolutely sure that you don’t miss the last possible “settlement date,” you should consider Dec. 24 as the last trading day, because Canadian stock exchanges are closed on Dec. 25 and 26 (always also confirm with your investment adviser.)
Letting Go of Losers
You may have been thinking of rebalancing your investment portfolio to bring it back into line with your risk-tolerance level and financial objectives. But this may mean incurring capital gains when trimming positions.So if paying capital gains tax on your winners has deterred you, sheltering these by letting go of your losers and using the tax losses to offset gains could be a smart strategy both for prudent portfolio management and for tax-saving opportunity.
Mutual Funds
One source of tax losses may be fixed-income mutual funds that were affected by talk by the U.S. Federal Reserve Board of tapering of its bond-purchasing program (also known as “quantitative easing”) and the consequent rising rate environment.If you hold a mutual fund and it sells off some winners, you may have a capital gains “surprise” in store at the end of the year. That’s all very pleasant of course, but you’ll want to minimize the tax hit.
Use your potential tax losses to offset mutual fund gains. Check with your adviser or call the mutual fund to see whether there are some capital gains in store this year.
Courtesy Fundata Canada Inc. Samantha Prasad, LL.B., is a Partner with Toronto law firm Minden Gross LLP, a Meritas Law Firm Worldwide affiliate. Portions of this article first appeared in The MoneyLetter, published by MPL Communications Ltd., reprinted with permission. © 2013. This article is not intended as personalized tax or investment advice. This article has been edited from its original version.
