Tax loss harvesting

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Tax loss harvesting, also known as tax loss selling, is the practice of selling shares (or units), held in a non-registered account, that have dropped in value to the point that a capital loss can be claimed. The capital loss can be used to offset capital gains, either in the current year or in the previous three tax years, or they can be carried forward to any future year.[1] Tax loss harvesting tends to happen near the end of the year, although there is no specific requirement.

Timing and settlement

Main articles: Settlement date and Tax planning

If you are tax loss harvesting near the end of the year, you should be aware of settlement dates and final trade dates. Important dates for security settlement are:

  • Dec 23rd, 2016 - final trade date for Canadian equities for settlement in 2016 tax year[2][3].
  • Dec 27th, 2016 - final trade date for US equities for settlement in 2016 tax year.[2][3]
  • Dec 29th, 2016 - final trade date for Options for settlement in 2016 tax year.

You should also check with your discount broker because some markets close early around holidays.

Superficial loss rules

Main article: Superficial loss

Canada Revenue Agency (CRA) rules specify that you or an affiliated person cannot buy back the security again within thirty (30) days or you will run afoul of CRA's superficial loss rules and the tax loss will be denied.

Transferring losses to your spouse

It is possible to use the superficial loss rules to transfer capital losses from one spouse to another to reduce their capital gains.[4] This involves one spouse (Jack) selling a security at a capital loss and having the other spouse (Jill) purchase the same security within 30 days. Superficial loss rules will deny Jack the capital loss, but Jill's adjusted cost base is increased by the amount of the capital loss. As long as Jill doesn't sell the security within 30 days from the original transaction, the capital loss has effectively been transferred between spouses. It is important to note that the specific timing of the transactions matters here.

Replacing the sold security

To keep your asset allocation constant despite the tax loss harvesting, you can repurchase a very similar, but not identical, security immediately. For example, you can sell your shares in Canadian bank A and purchase shares in Canadian bank B with the proceeds. Or you can sell shares of an exchange-traded fund (ETF) covering Canadian equities and buy another ETF based on a slightly different index (see external links below for more details).

See also

References

  1. Canada Revenue Agency (CRA), How do you use a capital loss?, viewed February 10, 2014.
  2. 2.0 2.1 "Tax treatment of investments - trade and settlement dates; Last trading date for 2016". TaxTips.ca. http://www.taxtips.ca/personaltax/investing/taxtreatment/tradeandsettlement.htm. Retrieved 13-Dec-2016.
  3. 3.0 3.1 "2016 Tax Information Centre". TD Direct Investing. https://www.td.com/ca/products-services/investing/td-direct-investing/investor-education/tax-information-centre.jsp.
  4. How your loss can be your spouse's gain - The Globe and Mail, viewed December 16, 2014.

Further reading

External links