For the fifth year in a row, I am posting a blog on tax loss selling. I am doing it again because the topic is very timely and every year around this time, people get busy with holiday shopping and forget to sell the “dogs” in their portfolio and as a consequence, they pay unnecessary income tax on their capital gains in April.
Additionally, while most investment advisors are pretty good at contacting their clients to discuss possible tax loss selling, I am still amazed each year at how many advisors do not discuss the issue with their clients. So if you have an advisor, ensure you are in contact to discuss your realized capital gain/loss situation and other planning options (if you have to initiate the contact, consider that a huge black mark against your advisor).
For full disclosure, there is very little that is new in this post from last year's version, other than my discussion of identical shares
I would suggest that the best stock trading decisions are often not made while waiting in line to pay for your child’s Christmas gift. Yet, many people persist in waiting until the third week of December to trigger their capital losses to use against their current or prior years capital gains. To avoid this predicament, you may wish to set aside some time this weekend or next, to review your 2015 capital gain/loss situation in a calm methodical manner. You can then execute your trades on a timely basis knowing you have considered all the variables associated with your tax gain/loss selling. As the markets are down this year, you may have some unrealized capital losses you can realize to use against capital gains reported the last 3 years. Alternatively, you may want to trigger a capital loss to utilize against capital gains you have already realized in 2015.
I would like to provide one caution in respect of tax loss selling. You should be very careful if you plan to repurchase the stocks you sell (see superficial loss discussion below). The reason for this is that you are subject to market vagaries for 30 days. I have seen people sell stocks for tax-loss purposes, with the intention of re-purchasing those stocks and one or two of the stocks take off during the 30 day wait period and the cost to repurchase is far in excess of their tax savings. Thus, you should first and foremost consider selling your "dog stocks" that you and/or your advisor no longer wish to own. If you then need to crystallize additional losses, be wary if you are planning to sell and buy back the same stock.
This blog post will take you through each step of the tax-loss selling
process.
All capital gain and capital loss transactions for 2015 will have to be reported on Schedule 3 of your 2015 personal income tax return. You then subtract the total capital gains from the total capital losses and multiply the net capital gain/loss by ½. That amount becomes your taxable capital gain or net capital loss for the year. If you have a taxable capital gain, the amount is carried forward to the tax return jacket on Line 127. For example, if you have a capital gain of $120 and a capital loss of $30 in the year, ½ of the net amount of $90 would be taxable and $45 would be carried forward to Line 127. The taxable capital gains are then subject to income tax at your marginal income tax rate.
If you have a net capital loss in the current year, the loss cannot be deducted against other sources of income. However, the net capital loss may be carried back to offset any taxable capital gains incurred in any of the 3 preceding years, or, if you did not have any gains in the 3 prior years, the net capital loss becomes an amount that can be carried forward indefinitely to utilize against any future taxable capital gains.
I suggest you should start your preliminary planning immediately. These are the steps I recommend you undertake:
1. Retrieve your 2014 Notice of Assessment. In the verbiage discussing changes and other information, if you have a capital loss carryforward, the balance will reported. This information may also be accessed online if you have registered with the Canada Revenue Agency.
2. If you do not have capital losses to carryforward, retrieve your 2012, 2013 and 2014 income tax returns to determine if you have taxable capital gains upon which you can carryback a current year capital loss. On an Excel spreadsheet or multi-column paper, note any taxable capital gains you reported in 2012, 2013 and 2014.
3. For each of 2012-2014, review your returns to determine if you applied a net capital loss from a prior year on line 253 of your tax return. If yes, reduce the taxable capital gain on your excel spreadsheet by the loss applied.
4. Finally, if you had net capital losses in 2013 or 2014, review whether you carried back those losses to 2012 or 2013 on form T1A of your tax return. If you carried back a loss to either 2012 or 2013, reduce the gain on your spreadsheet by the loss carried back.
5. If after adjusting your taxable gains by the net capital losses under steps #3 and #4 you still have a positive balance remaining for any of the years from 2012 to 2014, you can potentially generate an income tax refund by carrying back a net capital loss from 2015 to any or all of 2012, 2013 or 2014.
6. If you have an investment advisor, call your advisor and request a realized capital gain/loss summary from January 1st to date to determine if you are in a net gain or loss position. If you trade yourself, ensure you update your capital gain/loss schedule (or Excel spreadsheet, whatever you use) for the year.
Now that you have all the information you need, it is time to be strategic about how to use your losses.
For discussion purposes, let’s assume the following:
· 2015: realized capital loss of $30,000
· 2014: taxable capital gain of $15,000
· 2013: taxable capital gain of $5,000
· 2012: taxable capital gain of $7,000
Based on the above, you will be able to carry back your $15,000 net capital loss ($30,000 x ½) from 2015 against the $7,000 and $5,000 taxable capital gains in 2012 and 2013, respectively, and apply the remaining $3,000 against your 2014 taxable capital gain. As you will not have absorbed $12,000 ($15,000 of original gain less the $3,000 net capital loss carry back) of your 2014 taxable capital gains, you may want to consider whether you want to sell any “dogs” in your portfolio so that you can carry back the additional 2015 net capital loss to offset the remaining $12,000 taxable capital gain realized in 2014. Alternatively, if you have capital gains in 2015, you may want to sell stocks with unrealized losses to fully or partially offset those capital gains.
Many people buy the same company's shares (say Bell Canada) in different accounts or have employer stock purchase plans. I often see people claim a loss on the sale of their Bell Canada shares from one of their accounts, but ignore the shares they own of Bell Canada in another account. However, be aware, you have to calculate your adjusted cost base on all the identical shares you own in say Bell Canada and average the total cost of all your Bell Canada shares over the shares in all your accounts. If the cost of your shares in Bell are higher in one of your accounts, you cannot pick and choose to realize a loss on that account; you must report the average adjusted cost base of all your Bell shares, not the higher cost base shares.
Where you have a large capital loss carryforward from prior years and it is unlikely that the losses will be utilized either due to the quantum of the loss or because you are out of the stock market and don’t anticipate any future capital gains of any kind (such as the sale of real estate), it may make sense for you to purchase a flow-through limited partnership (be aware; although there are income tax benefits to purchasing a flow-through limited partnership, there are also investment risks and you must discuss any purchase with your investment advisor).
Purchasing a flow-through limited
partnership will provide you with a write off against regular income
pretty much equal to the cost of the unit; and any future capital gain
can be reduced or eliminated by your capital loss carryforward.
For example, if you have a net capital loss carry forward of $75,000 and
you purchase a flow-through investment in 2015 for $20,000, you would
get approximately $20,000 in cumulative tax deductions in 2015 and 2016,
the majority typically coming in the year of purchase. Depending upon
your marginal income tax rate, the deductions could save you upwards of
$9,200 in taxes. When you sell the unit, a capital gain will arise. This
is because the $20,000 income tax deduction reduces your adjusted cost
base from $20,000 to nil (there may be other adjustments to the cost
base). Assuming you sell the unit in 2017 for $18,000 you will have a capital gain of $18,000 (subject to any other adjustments) and the entire $18,000 gain will be eliminated by your capital
loss carry forward. Thus, in this example, you would have total
after-tax proceeds of $27,200 ($18,000 +$9,200 in tax savings) on a
$20,000 investment.
Prior to March 22, 2011, you could donate your publicly listed flow-through shares to charity and obtain a donation receipt for the fair market value ("FMV") of the shares. In addition, the capital gain you incurred [FMV less your ACB (ACB is typically nil or very low after claiming flow-through deductions)] would be exempted from income tax. However, for any flow-through agreement entered into after March 21, 2011, the tax benefit relating to the capital gain is eliminated or reduced. Simply put (the rules are more complicated, especially for limited partnership units converted to mutual funds and an advisor should be consulted), if you paid $25,000 for your flow-through shares, only the gain in excess of $25,000 will now be exempt and the first $25,000 will be taxable.
So if you are donating flow-through shares to charity this year, ensure you speak to your accountant as the rules can be complex and you may create an unwanted capital gain.
One must always be cognizant of the superficial loss rules. Essentially, if you or your spouse (either directly or through an RRSP) purchase an identical share 30 calendar days before or 30 days after a sale of shares, the capital loss is denied and added to the cost base of the new shares acquired.
Every year, I ask at least one or two clients why their dividend income is lower on their personal tax return. Typically the answer is, "oops, it is lower because I sold a stock early in the year that I forgot to tell you about". Thus, if you manage you own investments; you may wish to review your dividend income being paid each month or quarter with that of last years to see if it is lower. If the dividend income is lower because you have sold a stock, confirm you have picked up that capital gain in your calculations.
In certain cases you can use certain provisions of the Income Tax Act to transfer losses to your spouse. As these provisions are complicated and subject to missteps, you need to engage professional tax advice.
It is my understanding that the settlement date for stocks in 2015 will be Wednesday December 24th. Please confirm this date with your broker, but assuming this date is correct, you must sell any stock you want to crystallize the gain or loss in 2015 by December 24, 2015.
As discussed above, there are a multitude of factors to consider when tax-loss selling. It would therefore be prudent to start planning now, so that you can consider all your options rather than frantically selling via your mobile device while sitting on Santa’s lap in the third week of December.
Additionally, while most investment advisors are pretty good at contacting their clients to discuss possible tax loss selling, I am still amazed each year at how many advisors do not discuss the issue with their clients. So if you have an advisor, ensure you are in contact to discuss your realized capital gain/loss situation and other planning options (if you have to initiate the contact, consider that a huge black mark against your advisor).
For full disclosure, there is very little that is new in this post from last year's version, other than my discussion of identical shares
I would suggest that the best stock trading decisions are often not made while waiting in line to pay for your child’s Christmas gift. Yet, many people persist in waiting until the third week of December to trigger their capital losses to use against their current or prior years capital gains. To avoid this predicament, you may wish to set aside some time this weekend or next, to review your 2015 capital gain/loss situation in a calm methodical manner. You can then execute your trades on a timely basis knowing you have considered all the variables associated with your tax gain/loss selling. As the markets are down this year, you may have some unrealized capital losses you can realize to use against capital gains reported the last 3 years. Alternatively, you may want to trigger a capital loss to utilize against capital gains you have already realized in 2015.
I would like to provide one caution in respect of tax loss selling. You should be very careful if you plan to repurchase the stocks you sell (see superficial loss discussion below). The reason for this is that you are subject to market vagaries for 30 days. I have seen people sell stocks for tax-loss purposes, with the intention of re-purchasing those stocks and one or two of the stocks take off during the 30 day wait period and the cost to repurchase is far in excess of their tax savings. Thus, you should first and foremost consider selling your "dog stocks" that you and/or your advisor no longer wish to own. If you then need to crystallize additional losses, be wary if you are planning to sell and buy back the same stock.
Reporting Capital Gains and Capital Losses – The Basics
All capital gain and capital loss transactions for 2015 will have to be reported on Schedule 3 of your 2015 personal income tax return. You then subtract the total capital gains from the total capital losses and multiply the net capital gain/loss by ½. That amount becomes your taxable capital gain or net capital loss for the year. If you have a taxable capital gain, the amount is carried forward to the tax return jacket on Line 127. For example, if you have a capital gain of $120 and a capital loss of $30 in the year, ½ of the net amount of $90 would be taxable and $45 would be carried forward to Line 127. The taxable capital gains are then subject to income tax at your marginal income tax rate.
Capital Losses
If you have a net capital loss in the current year, the loss cannot be deducted against other sources of income. However, the net capital loss may be carried back to offset any taxable capital gains incurred in any of the 3 preceding years, or, if you did not have any gains in the 3 prior years, the net capital loss becomes an amount that can be carried forward indefinitely to utilize against any future taxable capital gains.
Planning Preparation
I suggest you should start your preliminary planning immediately. These are the steps I recommend you undertake:
1. Retrieve your 2014 Notice of Assessment. In the verbiage discussing changes and other information, if you have a capital loss carryforward, the balance will reported. This information may also be accessed online if you have registered with the Canada Revenue Agency.
2. If you do not have capital losses to carryforward, retrieve your 2012, 2013 and 2014 income tax returns to determine if you have taxable capital gains upon which you can carryback a current year capital loss. On an Excel spreadsheet or multi-column paper, note any taxable capital gains you reported in 2012, 2013 and 2014.
3. For each of 2012-2014, review your returns to determine if you applied a net capital loss from a prior year on line 253 of your tax return. If yes, reduce the taxable capital gain on your excel spreadsheet by the loss applied.
4. Finally, if you had net capital losses in 2013 or 2014, review whether you carried back those losses to 2012 or 2013 on form T1A of your tax return. If you carried back a loss to either 2012 or 2013, reduce the gain on your spreadsheet by the loss carried back.
5. If after adjusting your taxable gains by the net capital losses under steps #3 and #4 you still have a positive balance remaining for any of the years from 2012 to 2014, you can potentially generate an income tax refund by carrying back a net capital loss from 2015 to any or all of 2012, 2013 or 2014.
6. If you have an investment advisor, call your advisor and request a realized capital gain/loss summary from January 1st to date to determine if you are in a net gain or loss position. If you trade yourself, ensure you update your capital gain/loss schedule (or Excel spreadsheet, whatever you use) for the year.
Now that you have all the information you need, it is time to be strategic about how to use your losses.
Basic Use of Losses
For discussion purposes, let’s assume the following:
· 2015: realized capital loss of $30,000
· 2014: taxable capital gain of $15,000
· 2013: taxable capital gain of $5,000
· 2012: taxable capital gain of $7,000
Based on the above, you will be able to carry back your $15,000 net capital loss ($30,000 x ½) from 2015 against the $7,000 and $5,000 taxable capital gains in 2012 and 2013, respectively, and apply the remaining $3,000 against your 2014 taxable capital gain. As you will not have absorbed $12,000 ($15,000 of original gain less the $3,000 net capital loss carry back) of your 2014 taxable capital gains, you may want to consider whether you want to sell any “dogs” in your portfolio so that you can carry back the additional 2015 net capital loss to offset the remaining $12,000 taxable capital gain realized in 2014. Alternatively, if you have capital gains in 2015, you may want to sell stocks with unrealized losses to fully or partially offset those capital gains.
Identical Shares
Many people buy the same company's shares (say Bell Canada) in different accounts or have employer stock purchase plans. I often see people claim a loss on the sale of their Bell Canada shares from one of their accounts, but ignore the shares they own of Bell Canada in another account. However, be aware, you have to calculate your adjusted cost base on all the identical shares you own in say Bell Canada and average the total cost of all your Bell Canada shares over the shares in all your accounts. If the cost of your shares in Bell are higher in one of your accounts, you cannot pick and choose to realize a loss on that account; you must report the average adjusted cost base of all your Bell shares, not the higher cost base shares.
Creating Gains when you have Unutilized Losses
Where you have a large capital loss carryforward from prior years and it is unlikely that the losses will be utilized either due to the quantum of the loss or because you are out of the stock market and don’t anticipate any future capital gains of any kind (such as the sale of real estate), it may make sense for you to purchase a flow-through limited partnership (be aware; although there are income tax benefits to purchasing a flow-through limited partnership, there are also investment risks and you must discuss any purchase with your investment advisor).
Donation of Flow-Through Shares
Prior to March 22, 2011, you could donate your publicly listed flow-through shares to charity and obtain a donation receipt for the fair market value ("FMV") of the shares. In addition, the capital gain you incurred [FMV less your ACB (ACB is typically nil or very low after claiming flow-through deductions)] would be exempted from income tax. However, for any flow-through agreement entered into after March 21, 2011, the tax benefit relating to the capital gain is eliminated or reduced. Simply put (the rules are more complicated, especially for limited partnership units converted to mutual funds and an advisor should be consulted), if you paid $25,000 for your flow-through shares, only the gain in excess of $25,000 will now be exempt and the first $25,000 will be taxable.
So if you are donating flow-through shares to charity this year, ensure you speak to your accountant as the rules can be complex and you may create an unwanted capital gain.
Superficial Losses
One must always be cognizant of the superficial loss rules. Essentially, if you or your spouse (either directly or through an RRSP) purchase an identical share 30 calendar days before or 30 days after a sale of shares, the capital loss is denied and added to the cost base of the new shares acquired.
Disappearing Dividend Income
Every year, I ask at least one or two clients why their dividend income is lower on their personal tax return. Typically the answer is, "oops, it is lower because I sold a stock early in the year that I forgot to tell you about". Thus, if you manage you own investments; you may wish to review your dividend income being paid each month or quarter with that of last years to see if it is lower. If the dividend income is lower because you have sold a stock, confirm you have picked up that capital gain in your calculations.
Creating Capital Losses-Transferring Losses to a Spouse Who Has Gains
In certain cases you can use certain provisions of the Income Tax Act to transfer losses to your spouse. As these provisions are complicated and subject to missteps, you need to engage professional tax advice.
Settlement Date
It is my understanding that the settlement date for stocks in 2015 will be Wednesday December 24th. Please confirm this date with your broker, but assuming this date is correct, you must sell any stock you want to crystallize the gain or loss in 2015 by December 24, 2015.
Summary
As discussed above, there are a multitude of factors to consider when tax-loss selling. It would therefore be prudent to start planning now, so that you can consider all your options rather than frantically selling via your mobile device while sitting on Santa’s lap in the third week of December.
This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation.
It is written by the author solely in their personal capacity and cannot be
attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional
advice, and neither the author nor the firm with which the author is associated
shall accept any liability in respect of any reliance on the information
contained herein. Readers should always consult with their professional advisors in respect of their particular
situation. Please note the blog post is time sensitive and subject to
changes in legislation or law.
Is there a minimum gain that you must achieve before you have to report? For example if my gain is only $5 can I ignore it since it is too small to bother with the paper work?
ReplyDeleteNope, report it
DeleteShould one compute the adjusted cost base across registered and non-registered accounts? I thought that registered accounts were considered as distinct (but related, for superficial loss purpose).
ReplyDeleteHi Anon
DeleteI guess I should have been clearer. You only avg your costs across non registered accts, not your RRSP
I am doing this a little last minute. But you stated that the settlement date is Wednesday December 24th. But the 24th is Thursday.
ReplyDeleteWere you referring to 2014?
I think for 2015 it is Monday, December 28th. Let me know if this is correct, as I may still have time!
Thank you.
Hi Louie
DeleteAsk your broker or trading platform, my understanding is Dec 24th, but confirm with one of the above.