Capital Gains and Tax-Loss Selling
What are Capital Gains?
A capital gain occurs when you purchase capital property (such as an investment) and it goes up in value, and then you sell or dispose of the property for higher than your adjusted cost base. Alternatively, a capital loss is when you purchase capital property and it goes down in value, and then you sell or dispose of the property for less than your adjusted cost base.
What is Tax-Loss Selling?
An opportunity exists right now to take advantage of something called "tax-loss selling". Tax-loss selling is the act of intentionally selling an investment to trigger a capital loss and thereby offset some capital gains. Now for 2021, this might be a little difficult as the markets have been very robust. But the idea is to sell something that's down to use it as a tax offset on something that's up.
When is it a good time to trigger a loss?
You have to be careful when you sell and create a loss. If you proceed to sell an investment in a loss position, you cannot repurchase it within 30 days. Otherwise, this may be considered a superficial loss and the loss may be denied for tax purposes.
The nice thing with a capital loss is you have three options.
- You can claim the loss in the current year.
- You can carry the loss back up to three tax years and file a T1A- Request for loss carryback form.
- You can carry the loss forward until there is a year you can use it.
What is the best way to realize this loss?
Now you have to be careful when you're moving the money from a cash or non-registered account into an RRSP, Tax-Free Savings Account or any registered account. The reason being that if you move it directly, the government can actually disallow that loss for you. My best recommendation would be that you sell it to cash first. Then move it into the desired account.
Are there any other ways to avoid capital gains?
One last tip I'm going to give you today is around charitable giving. If you donate publicly-traded securities in-kind (meaning "as is" to a charity that's in a capital gain position), it is more tax-efficient since the inclusion rate on the capital gains will be 0%, instead of the normal 50% inclusion rate for capital gains. Basically, the tax owing on the capital gain is eliminated. Plus you get a charitable donation tax receipt from the charity for the same amount as if you have donated the cash proceeds. This presents another great opportunity to save some money and contribute to a favourite cause.
Whenever we're talking about things like taxes, I highly recommend you consult with your trusted tax professional or financial advisor to make sure this makes sense for you. If you have any questions please reach out to me and my team, we are happy to consult with you on the best way to optimize your tax situation.
This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Jamie Powell is solely responsible for its content. For more information on this topic or any other financial matter, please contact an IG Wealth Management Consultant.