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.
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.
|Realized Capital Gain Romeo||Realized Capital Loss Charlie||Net Capital Gain||Tax Owing*|
|Sell Romeo only||20,000||0||20,000||5,356|
|Sell Charlie and Romeo||20,000||(15,000)||5,000||1,339|
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.