You are sitting at your computer reviewing your investment portfolio and can’t help but notice a few of those energy stocks that took a massive beating this year. You are at a large loss on a few of them and are planning on what to do for the coming year.
I am sure we have all heard the old adage “buy low, sell high”. However, for once, selling low may be to your advantage. Let me explain how this works…
Simply put, the Canada Revenue Agency (CRA) allows you to use capital losses on non-registered investments to be used against capital gains in order to lower your tax bill.
It only applies to non-registered investments. This can include stocks, bonds, mutual funds and even secondary investment properties.
Tax Losses can be carried back up to 3 years and can be carried forward indefinitely. For example, if you realized an incredible gain on one of your stock picks in 2012 and had to pay a large amount of taxes, you can now counter that gain with a current loss. This gives you the ability to recover some of the taxes paid. However, if you have no recognized capital gains in the prior 3 years, you can carry the loss forward against a future capital gain to save taxes when the gain arises.
You cannot re-purchase the asset you sold within the 30 days following the sale. In the CRA’s books re-purchasing the same asset that was sold within this 30 day window makes it a “superficial loss”. Superficial losses cannot be counted as tax losses to counter capital gains. The superficial loss also applies if the asset was re-purchased by your spouse/common law partner or a company you control.
Situations where you can benefit from Tax Loss Selling
You incurred a large capital gain within the past 3 years. In this instance you could sell an asset that is at a large loss in the current year to counter the capital gain you recognized in the previous year and get some of your money back from the tax man!
You have a large recognized capital gain during the current fiscal year. It is possible that earlier on in the year you sold an asset for a substantial gain and would like to save yourself from the tax burden by countering it with a capital loss to either lower or eliminate any taxes that would be payable.
You expect a future capital gain. You may have an investment property and intend on selling it a few years down the road for a substantial profit. In this case, your current capital losses can be used to counter future capital gains.
Cutting your losses. People can always make mistakes and companies can always change fundamentally. It may be time to cut your losses on certain stocks that you deem will not recover or that your money is better put to work elsewhere.
As seen above, selling low can reap some benefits after all; no one wants to pay more money than necessary in taxes!