What is tax loss selling anyway?

Tax loss selling is a strategy to reduce tax by triggering capital losses now and using them against capital gains. If you have realized capital gains this year, in any of the past 3 tax years or expect to realize gains in the near future, this strategy can help reduce your tax.  In a best-case scenario, it can mean triggering a refund cheque from the CRA!

To take advantage of this strategy you must sell a capital property at a loss. The most popular target for this is the proverbial “stock I never should have bought”. The target stock is trading well below the price you paid, and you see no upside in the near future. While it might be a tough thing to let go, the tax savings might be the push you need to finally dump that loser.  Let’s illustrate an example below.

This is how it works in practice

You own two securities, Charlie and Romeo.  Charlie has been a loser since you took an interest in it (you are down $15,000 from where you bought), but you have hung on to it in the hopes it will come back up. Romeo has done well (it is up $20,000 from where you bought), and you have sold Romeo at a gain to lock in the profits. The following shows the tax outcomes of selling just Romeo or taking it a step further and doing the tax loss sale of Charlie as well.

As you can see tax-loss selling can result in significantly reduced capital gains taxes – about $4,000 in this illustration.

With all the market volatility this past year, there may be positions that you hold in your portfolio that will make good candidates for tax loss selling.  But read on – you need to BE CAREFUL.

Important considerations

• You cannot purchase the loss shares (or a right to acquire the loss shares) during the period that begins 30 days prior to the sale or repurchase the loss shares for 30 days after the sale. If you break this rule, the CRA will deny the loss as a “superficial loss” (no tax savings for you!) and the loss will be added to the ACB of the shares purchased and no immediate benefit will be obtained.
• Tax loss selling only works on non-registered portfolios, capital gains and losses in registered portfolios are not relevant to your tax return.
• In order to take advantage of this tax strategy, the tax loss sale must settle in the current tax year –check with your investment advisor to ensure trades are settled on or before December 31, 2020.
• Take a look now at your portfolios and see if there is any potential to take advantage of this great tax strategy!