While October signals the start of postseason baseball, an exciting prospect for playoff-starved Blue Jays fans across the land, it also marks the beginning of year-end tax planning season as there are several things you must do before Dec. 31 to reap the benefits when you file your 2015 tax return next spring.
Perhaps the most popular year-end strategy is tax loss selling, which has been a popular subject of discussion of late due to the rocky year we’ve experienced in most major stock markets. Tax loss selling involves selling investments with accrued losses prior to Dec. 31 to offset capital gains realized either elsewhere in your portfolio or from the sale of another asset, such as a vacation home or rental property.
Any net capital losses that cannot be used in the current year may either be carried back three years or carried forward indefinitely to offset net capital gains in those years. In order for your loss to be immediately available for 2015 (or one of the prior three years), the settlement must take place in 2015, which means the trade date must be no later than Dec. 24, 2015.
Note that if you purchased securities in a foreign currency, the gain or loss may be larger or smaller than you anticipated once you take the foreign exchange component into account. The recent decline in the value of the Canadian dollar may increase capital gains or decrease capital losses, or, in some cases, turn what looks like a loss into a gain.
For example, Jake bought 1,000 shares of a U.S. company in February 2013 when the price was US$10/share and the U.S. dollar was at par with the Canadian dollar. Today, the price of the shares has fallen to US$9 and Jake decides he wants to do some tax loss harvesting, to use the US$1,000 {(US$10 – US$9) X 1,000} accrued capital loss against gains he realized earlier this year.
Well, before knowing if this strategy will work, we need to convert the potential U.S. dollar proceeds back into Canadian dollars. At this week’s exchange rate of US$1 = $1.34, selling the U.S. shares for US$9,000 yields $12,060. So, what initially appeared to be an accrued capital loss of US$1,000 (US$10,000 – US$9,000) turns out to be a capital gain of $2,060 ($12,060 – $10,000) for Canadian tax purposes. If Jake had gone ahead and sold the U.S. stock, he would actually be doing the opposite of tax loss selling and accelerating his tax bill on the accrued capital gain to 2015!
Finally, keep in mind that should you wish to repurchase a security you sold at a loss, the “superficial loss” rules can trip you up. The rule applies when you sell property for a loss and buy it back within 30 days of the sale date. The rules also apply if property is repurchased within 30 days by an “affiliated person,” including your spouse (or partner), a corporation controlled by you or your spouse (or partner), or a trust of which you or your spouse (or partner) are a majority interest beneficiary (such as your RRSP or TFSA).
Under the superficial loss rule, your capital loss will be denied and added to the adjusted cost base (tax cost) of the repurchased security. That means the benefit of the capital loss can only be obtained when the repurchased security is ultimately sold.