Do you invest in a taxable investment account, either personally or through your private corporation?
Do you sometimes have investment positions that experience temporary losses?
If yes, then you need to understand “tax loss harvesting”. Keep reading…
Tax loss harvesting is a tax-saving strategy that allows investors to offset capital gains with capital losses. By selling securities that have decreased in value, investors can realize a capital loss, which can then be used to offset capital gains from other securities, ultimately reducing the amount of taxes that need to be paid on investment income.
In Canada, tax loss harvesting can be an effective way to minimize taxes, but it’s important to understand the rules and regulations enforced by the Canada Revenue Agency (CRA) to ensure that you are utilizing the strategy correctly and avoiding any tax traps.
Problem 1: limitation of capital loss utilization:
Capital losses can ONLY be applied against capital gains. This means that if you sell an investment in a loss position and realize the loss it can only be applied to other capital gains. For example, capital losses can not be used to offset business or employment income.
You get around this by matching losses and gains on different securities against each other within the same taxation period.
Problem 2: The superﬁcial loss rules:
The superﬁcial loss rule prevents investors from claiming capital losses on securities that they have sold, and then repurchasing them shortly after, without actually reducing their overall investment position.
This rule states that if an investor (or a person afﬁliated with the investor) acquires substantially identical securities within 30 days before or after a capital loss is realized, the loss cannot be claimed.
It applies to non-registered accounts, and the goal is to prevent investors from artiﬁcially creating capital losses for tax purposes without actually changing their investment position.
Ways around this…
One way around the superﬁcial loss rules is to re-purchase securities that are substantially different to the security you sold, but co-relate in terms of market movement.
For example, let’s say your position in “ABC” Bank is temporarily down and you sell it to realize the temporary loss. You don’t want to be out of ABC in the long run and you certainly don’t want to lose out on any gains over the next 30 days.
Instead, what you can do is purchase a banking sector ETF (exchange traded fund) that moves in a similar direction to ABC bank, then after your 30 day time period has elapsed you can sell the ETF and replace it with your original ABC bank holding.
In conclusion, tax loss harvesting is a valuable strategy for Canadian investors looking to reduce their tax bill. By understanding and following the rules enforced by the CRA, investors can minimize their taxes and keep more of their investment income. However, it’s important to be aware of the tax traps and to keep accurate records of all your investments to ensure that you are utilizing the strategy correctly and avoiding any mistakes.
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