Managing Your Money

Not every investment is going to be a winner. Buying stocks that go down in value is simply part of investing. While it usually makes sense to stick to the old adage “buy low, sell high”, tax loss selling is one of the few times where it could make sense to actually sell low. Tax loss selling is a tax saving strategy used by investors to reduce the tax you pay on a capital gain. It only applies to investments that are held outside a TFSA or RRSP but can include many types of investments from mutual funds and stocks, to real estate and other types of property.

Steps to Tax Loss Selling

  1. Identify a capital gain that you would like to reduce the taxes on. Keep in mind that not every capital gain is taxable. It can be in the current year, or one that you expect to have in the future, such as if you plan to sell land next year. It can even be a capital gain that you already paid tax on in one of the previous three tax years.  You can mix capital gains and capital losses on different types of investment such as stocks and land or cottage and mutual funds.
  2. Identify investments that are down in value and decide what you want to sell – more on this later.
  3. If you end up triggering more losses than you can offset with capital gains in the current year, you can either go back three years and use those losses against previous gains to get a tax refund, or hang on to them and use them in future.

Deciding What to Sell

As humans, we are victims of conventional wisdom.  Our minds often get in the way of making good decision. While stock markets typically move upwards over long periods of time, individual investments don’t always keep pace, and really bad ones can simply tank.  When it comes to dealing with investment “lemons”, behavioral biases can get in the way and can result in unsound financial judgment.

Sometimes investors will avoid selling a losing stock because they don’t consider it a loss until it’s sold, and therefore they don’t have to admit to themselves that they’ve made a judgement error in buying a bad investment. Many will hold onto the investment with the hopes of it returning to their purchase price (or more) so that they can at least break even and “erase” their mistake. Watch for this type of thinking.  A good rule of thumb when deciding whether or not to keep or sell an investment, is to ask yourself “If I didn’t own this stock right now, would I buy it today?”  If the answer is a clear “no”, then consider that carefully….

Cautions

While the steps to tax loss selling are simple, the rules around it can easily cause glitches and have your losses denied. Here is one common mistake. This usually occurs when you want to trigger the loss but keep exposure to the investment. When you move an investment that has a gain on it from a non-registered portfolio to a TFSA or RRSP, that move automatically triggers the gain and you pay tax on the gain.  Unfortunately, that does not hold true when we’re dealing with a loss. Say for example you have Stock A which has dropped in value by $5,000 from when you purchased it, but you still think the stock has potential and you want to keep it, so you move the investment, in-kind, into your RRSP.  You will trigger that $5000 loss, but the tax benefit from the loss will be denied. If it had a gain, you would pay tax on the gain though.  The same applies if you transfer Stock A to your spouse or other arm’s length person or to your own corporation.

Similarly, when an investor wants to keep exposure to an investment but want to trigger the loss, they will sometimes sell the investment (i.e. Stock A) with a $5,000 loss, then buy it right back with a lower cost base. But watch out! If Stock A is bought back within 30 days it will be considered a superficial loss and be denied, resulting in zero tax benefit. So, if you actually want to get rid of bad investment, it’s fairly straight forward, but if you want to maintain exposure to the investment you need to work within the rules. One way around this 30-day rule is to sell your investment at a loss and buy back a similar (but not the same) investment. For example, if you sell Bank ABC and buy Bank DEF or sell Bank ABC and buy a Bank ETF, you can trigger the loss on the losing stock and maintain expose to the sector through another investment.  Once the 30 days has past you can buy back Bank ABC.

If your investment is in a foreign currency, don’t forget to factor in the currency exchange back to Canadian dollars.  It’s possible that the investment per se went down but if the foreign currency was weak compared to the Canadian dollar then you may end up with a net capital gain on the transaction, and therefore no actual loss.

Tax loss selling is a fairly straightforward strategy. However, the rules that can make it somewhat complicated and can get you into trouble if you don’t follow them. Being denied a tax loss that you’re counting on to reduce your taxes can be very frustrating and disappointing. So, discuss this strategy with your accountant or wealth manager to make sure it works the way you expect it to, and that you are using it with the right timing.  To benefit from the losses for 2019, don’t wait until the last available trading day of the year! Check with your investment advisor for their deadline to sell.

Wishing you all a wonderful Holiday Season and a happy & healthy New Year!

Lynn MacNeil, F.PL. Vice President, Investment Advisor, is a Financial Planner with Richardson GMP Limited in Montreal, with over 24 years of experience working with retirees and pre-retirees. For a second opinion, 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 Or visit our website at www.EphtimiosMacNeil.com

The opinions expressed in this report are the opinions of the author and readers should not assume they reflect the opinions or recommendations of Richardson GMP Limited or its affiliates. Assumptions, opinions and estimates constitute the author’s judgment as of the date of this material and are subject to change without notice. We do not warrant the completeness or accuracy of this material, and it should not be relied upon as such. Before acting on any recommendation, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Past performance is not indicative of future results.

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