How to Turn Temporary Investment Losses into Long Term Tax Benefits

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.

Are you ready to take a step for­ward and se­cure a lu­cra­tive fi­nan­cial fu­ture for your­self and your fam­ily? We are al­ways ready to speak to am­bi­tions en­tre­pre­neurs and high-in­come earn­ing fam­i­lies look­ing for an edge.

Feel free to con­tact us for a zero-cost, 30-minute, on­line meet­ing where we can get to know you and de­ter­mine if we can help you pave a path to fi­nan­cial suc­cess.