Managing Your Money

Few people want to think about taxes at this time of year, especially considering the tax deadline isn’t until April. But take a moment from your holiday planning to consider some year-end tax strategies, and it could save you a bundle in the long run.

While there are a few “end of year” tax considerations, probably the most common one is “tax loss selling”. This is where you sell an investment that has gone down since you bought it, so that you actually realize the loss. Then you claim that loss against realized capital gains, either in the current year, from the three previous years, or in future years. This is a strategy that can be used in non-registered investments, but doesn’t apply to RRSP, RRIF, or TFSA investments, as the gains would not be taxable anyway.

Here’s an example:

Jerry worked for ABC Company for over 20 years. Upon his retirement this year he decided to sell his company’s shares which he had accumulated during the years he was at ABC. The shares had a capital gain of $30,000. Since capital gains are only 50% taxable, $15,000 of that $30,000 would be taxable. Jerry retired in July, only to start an unexpected, and very lucrative 3-month contract in September. This meant that his income would be even higher this year than in previous years, putting him at a 48% tax rate. He’ll pay $7,200 of tax on that capital gain that he triggered on his shares.

If he had known his income would be so high this year, he would have delayed selling the shares until next year, when he’d be in a lower tax bracket. But since what’s done is done, Jerry is now looking for ways to reduce the tax bill on that capital gain. This is where “tax-loss selling” can help.

Jerry bought an investment a few years ago that his son told him was a “sure bet”. He put in $100,000, and it’s now worth $80,000. Having a bad feeling about the future of this “sure bet”, he decided to sell the investment and realize a capital loss of $20,000. This will reduce his original capital gain from $30,000 to $10,000, and therefore, his tax liability would be $2,400 instead of $7,200! ($30,000-$20,000=$10,000 x50%=$5,000 x48%tax rate= $2,400). That’s a $4,800 tax savings!

BUT, there are some important considerations before jumping into tax loss selling. First of all, if you sell an investment that has decreased in value, you lose the potential opportunity for the investment to recover. So this strategy should only be considered if you have an investment that you would probably be selling anyway. First consider the investment fundamentals, then the tax impact. Now, if you’re thinking you’ll be sneaky, and sell the investment that dropped to trigger the loss, then buy it right back to keep the chance of it going back up, uh-uh…sorry, that’s not going to work. If you buy back the same investment within 30 days, it’s considered a “superficial loss” and you won’t be able to use it against capital gains. Still trying to think creatively, and planning to buy the investment back in another account like your RRSP or TFSA, or maybe in your spouse’s account? That won’t work either. You can’t claim the loss if you, or someone affiliated to you buys back the same investment, unless you wait 30 days before buying it back.

However, there is a way to “kind of” get around the superficial loss rule. If you have an investment that has dropped in value, and you want to trigger the loss, but you still think there is potential for the investment to go back up, you could sell it at a loss and buy back a SIMILAR investment. So let’s say you were holding a bank stock that was down, you could consider selling it and either buying in its place a different bank stock or a mutual fund or exchange traded fund heavily weighted in the banking industry.

One more important consideration is timing. In order for your loss to count for the current year, the sale has to settle on, or before, December 31st. Settlement usually takes three business days. So check with your financial institution for the last day you can sell, when considering weekends and holidays.

As I mentioned before, this is one of a few year-end tax planning considerations. Your financial planner can help you decide if tax-loss selling or any other strategies make sense for you. Since the rules can be pretty tricky, it makes sense to get professional advice before going ahead and implementing this type of strategy.

ANNOUNCEMENT: Please note that as of October 1st, 2015, Lynn MacNeil has joined Richardson GMP, Canada’s largest independent wealth management firm. Please see below for her updated contact information.

Lynn MacNeil, F.PL. is a Financial Planner with Richardson GMP Limited in Montreal, with 20 years experience working with retirees and pre-retirees. For a private financial consultation, or more information on this topic or on any other investment or financial matter, please contact Lynn MacNeil at 514.981.5795 or Lynn.MacNeil@RichardsonGMP.com.

The opinions expressed in this article are the opinions of Lynn MacNeil and readers should not assume they reflect the opinions or recommendations of Richardson GMP Ltd. or its affiliates. The comments contained herein are general in nature and are not intended to be, nor should be construed to be, legal or tax advice to any particular individual. Accordingly, individuals should consult their own legal or tax advisors for advice with respect to the tax consequences to them, having regard to their own particular circumstances. Richardson GMP Limited, Member Canadian Investor Protection Fund.

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