As the end of the year quickly approaches, like me you are probably looking forward to enjoying the upcoming festive season. However, along with your last-minute shopping, another activity which makes sense at year end is tax loss selling.
When it comes to investing, they can’t all be winners. Sometimes an investment does not pan out and you end up in a loss position. When such investments are held in taxable accounts, a popular strategy is to sell the investments that have dropped in value and trigger capital losses. Those capital losses can be used to offset taxable capital gains in the current year, with any excess carried back to the previous three years or carried forward indefinitely. This provides a silver lining where a poor-performing investment can lead to tax savings. This technique known as tax-loss selling or tax-loss harvesting is only applicable for non-registered accounts and does not apply to tax-sheltered accounts such as RRSPs or TFSAs.
Superficial Loss Rule
It is important for investors to be aware of the ‘superficial loss rule’ that applies when looking to harvest tax losses. An investor or anyone “affiliated” to them, like their spouse or a company that they control, cannot repurchase the fund within 30 days of selling it, or else this will disqualify the capital losses as being used for tax purposes.
How to avoid the superficial loss rule
Oddly enough, parents, siblings and children/grandchildren are not considered to be ‘affiliated’ with you for tax purposes. Therefore, an opportunity exists to transfer investments in a capital loss position “in-kind” to a son or daughter, for example, without worrying about the superficial loss rules affecting your ability to claim the capital loss when filing your tax return.
Another option is donating the investment to your favorite charity. Clients who wish to make a charitable donation but still want to hold onto a particular fund can donate the fund in-kind and then immediately buy it back with the cash they would otherwise have used to make the donation. This strategy allows for tax savings while maintaining the position in the client’s portfolio.
Benefits and Downfalls of Tax-Loss Selling
Each year we make a point to remind our clients that tax-loss selling is of secondary importance when compared to the long-term benefits of investing in a mutual fund with a solid track record. Tax-loss selling should not form the basis of major investment decisions and should not fundamentally change an investors’ asset allocation. While the benefits of harvesting losses may prove to be a savvy financial decision for an investor, we continue to hold the mentality that maintaining a long-term focus has proven to yield the best results for our investors.
Please let us know if you require further information.
Sincerely,
Mani Fenili (13-Dec-2021)
THE COMMENTS CONTAINED HEREIN ARE A GENERAL DISCUSSION OF CERTAIN ISSUES INTENDED AS GENERAL INFORMATION ONLY AND SHOULD NOT BE RELIED UPON AS TAX OR LEGAL ADVICE. PLEASE OBTAIN INDEPENDENT PROFESSIONAL ADVICE, IN THE CONTEXT OF YOUR PARTICULAR CIRCUMSTANCES. THIS ARTICLE WAS WRITTEN, DESIGNED AND PRODUCED BY MANI FENILI FOR THE BENEFIT OF MANI FENILI WHO IS A FINANCIAL ADVISOR FOR BRANDON LINDSAY INSURANCE AGENCIES, A TRADE NAME REGISTERED WITH INVESTIA FINANCIAL SERVICES INC., AND DOES NOT NECESSARILY REFLECT THE OPINION OF INVESTIA FINANCIAL SERVICES. THE INFORMATION CONTAINED IN THIS ARTICLE COMES FROM SOURCES WE BELIEVE RELIABLE, BUT WE CANNOT GUARANTEE ITS ACCURACY OR RELIABILITY. THE OPINIONS EXPRESSED ARE BASED ON AN ANALYSIS AND INTERPRETATION DATING FROM THE DATE OF PUBLICATION AND ARE SUBJECT TO CHANGE WITHOUT NOTICE. FURTHERMORE, THEY DO NOT CONSTITUTE AN OFFER OR SOLICITATION TO BUY OR SELL ANY SECURITIES. MUTUAL FUNDS, APPROVED EXEMPT MARKET PRODUCTS AND/OR EXCHANGE TRADED FUNDS ARE OFFERED THROUGH INVESTIA FINANCIAL SERVICES INC.
