This article describes how you can maximize the opportunities associated with tax loss selling to help reduce your tax liability or obtain refunds of taxes paid in previous years.
When you sell a security at a loss, you can use 50 per cent of this capital loss (called an "allowable capital loss") to offset taxable capital gains that you realize in the same year. This may reduce your tax liability for that year. Unfortunately, losses realized in your investment portfolio may be used against capital gains only - they cannot be used to reduce your other income for the year such as employment income.
Net capital losses
Capital losses realized in a given year must first be used to offset capital gains realized in the same year to reduce the current year's tax liability. When you have no capital gains in the current year or your capital losses in the year exceed your capital gains, the remaining capital loss is known as a "net capital loss."
You can carry a net capital loss back and apply it against taxable capital gains realized in any of the previous three years, which could result in a refund of capital gains tax paid in those years. For example, losses realized in 2008 could be applied against net capital gains realized in 2005, 2006 or 2007. You can also carry net capital losses forward indefinitely to use against taxable capital gains in future years.
Why use capital losses? There are a number of reasons why you may wish to trigger capital losses. For example:
- A particular security no longer meets your investment criteria
- You wish to reduce your tax liability for the current year by offsetting your capital gains realized in the year
- You wish to recoup taxes paid on capital gains realized in 2005, 2006 and 2007 by carrying back net capital losses realized this year
- You have triggered gains by making gifts of securities to your beneficiaries during your lifetime as part of your estate plan and wish to offset these gains to minimize the tax impact of such transfers
- You have sold your business and have realized a sizable gain on the disposition of your shares
- You have realized a capital gain on the sale of real estate that is not your principal residence
According to our tax rules, there are certain situations where you could realize a capital loss if a security declined in value even if you did not sell it on the market. These include deemed dispositions such as:
- Transferring a security to an individual other than your spouse
- Transferring assets to any person other than your spouse or a spousal trust upon your death
- During the period that begins 30 days before and ends 30 days after the settlement date of the disposition, you or a person affiliated with you acquires the identical property that was sold at a loss
- At the end of that period (i.e. 30 days after the settlement date of the disposition), you or a person affiliated with you owns or has a right to acquire the identical property.
Note: The material in this column is intended as a general source of information only, and should not be construed as offering specific tax, legal, financial or investment advice. Every effort has been made to ensure that the material is correct at time of publication, but we cannot guarantee its accuracy or completeness. Interest rates, market conditions, tax rulings and other investment factors are subject to rapid change. Individuals should consult with their personal tax advisor, accountant or legal professional before taking any action based upon the information contained in this column.
* David Konning is an investment and retirement planner at Royal Bank. He can be reached at David.Konning@rbc.com or by phone at 856-0406.
David Pylyp; These tax laws are available for multi unit property owners who can offset capital gains from Real Estate investments against other capital losses. PLEASE CONSULT YOUR ACCOUNTANT FOR PROPER TAX PLANNING.