In keeping with my annual tradition, I am today posting a blog on tax-loss selling, except this year, I changed the title to tax gain/loss selling (to include some planning for stocks with capital gains). I am posting on this topic again because every year around this time, people get busy with holiday shopping (or at least online shopping these days) and forget to sell the “dogs” in their portfolio and consequently, they pay unnecessary income tax on their capital gains in April. Alternatively, selling stocks with unrealized gains may be beneficial for tax purposes in certain situations.
Hopefully, based on the strong stock markets of both 2020 and 2021, you do not have many unrealized capital losses. However, the last half of 2021 has been very sector oriented and you may have stocks that were hit on the sector rotation. In fact, in a November 22nd Globe and Mail article by Tim Shufelt, he noted that 17% of S&P/TSX composite stocks were down by at least 10% year to date. That was before the large market drop on Black Friday.
In any event, if you have an advisor, ensure you are in contact to discuss your realized capital gain/loss situation and other planning options by next week and if you are a DIY investor set aside some time this weekend or next to review your 2021 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.
I am going to exclude the detailed step by step capital gain/loss methodology I usually include in this post. If you wish the detail, just refer to last year's post and update the years (i.e., use 2021, 2020 & 2019 in lieu of 2020, 2019 and 2018).
You have three options in respect of capital losses realized in 2021:
1. You can use your 2021 capital losses to offset your 2021 realized capital gains
2. You can carry back your 2021 net capital loss to offset any net taxable capital gains incurred in any of the three preceding years
3. If you cannot fully utilize the losses in either of the two above ways, your can carry your remaining capital loss forward indefinitely to use against future capital gains (or in the year of death, possibly against other income)
I would like to provide one caution about 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—raising the cost to repurchase far in excess of their tax savings.
Many people buy the same company's shares (say Bell Canada for this example) in different non-registered accounts or have employer stock purchase plans. I often see people claim a gain or loss on the sale of their Bell Canada shares from one of their non-registered accounts but ignore the shares they own of Bell Canada in another account. Be aware, you must calculate your adjusted cost base over on all the identical shares you own in all your non-registered accounts and average the total cost of your Bell Canada shares over the shares in all your accounts. If the cost of your shares in Bell is higher in one of your accounts, you cannot pick and choose to realize a gain or loss on that account; you must report the gain or loss based on the average adjusted cost base of all your Bell shares.
One must always be cognizant of the
superficial loss rules. Essentially, if you or your spouse (either
directly or through an RRSP) purchases an identical share 30 calendar
days before or 30 days after a sale of shares, the capital loss is
denied and is added to the cost base of the new shares acquired.
While typically most people are looking at tax-loss selling at this time of year, you may also want to consider selling stocks with gains for the reasons discussed below.
Donation of Marketable Securities
If you wish to make a charitable donation, a great way to be altruistic and save tax is to donate a marketable security that has gone up in value. As discussed in this blog post, when you donate qualifying securities, the capital gain is not taxable and you get the charitable tax credit. Please read the blog post for more details.
While I don’t comment on rumours and conjecture,
there are many tax commentators who feel there is a good chance the
capital gains inclusion rate will increase from 50% to a higher rate in a
future budget. If you are in that camp, you may wish to lock in capital gains at the lower rate. As no-one knows if the capital gains rate will change, you need to review this with your advisor as the sale will be taxable immediately, even if you buy-back the same security (there are no superficial gain rules).
It is important any 2021 tax planning trade be made by the settlement date, which my understanding is the trade date plus two days (U.S. exchanges may be different). See this excellent summary for a discussion of the difference between what is the trade date and what is the settlement date. The summary also includes the 2021 settlement dates for Canada and the U.S.
Corporations - Passive Income Rules
If you intend to tax gain/loss sell in your corporation, keep in mind the passive income rules. This will likely require you to speak to your accountant to determine whether a realized gain or loss would be more effective in a future year (to reduce the potential small business deduction clawback) than in the current year.
As discussed above, there are a multitude of factors to consider when tax gain/loss selling. It would therefore be prudent to start planning now with your advisors, so that you can consider all your options rather than frantically selling at the last minute.
I have a gain/loss question surrounding an Ontario small business Corporation.ReplyDelete
I had some taxable gains this year from stock sales and I am wondering if I can claim a capital loss for an unpaid commercial loan from several years ago against it?
The loan was for approx $70,000 and I was a part owner of the corporation that was loaned the money, but sold out a few years later.
I am 100% sure I will never see a dime of that money ever again.
This may be a little complicated. You need to speak to your accountant as this could potentially be an allowable business investment loss that may be more beneficial than a capital loss depending upon the facts
Thank you for your reply!Delete
The capital gains were greater than the $70,000 loan loss. I read that allowable business investment losses are only 25% deductible?
To me that would make the capital loss claim more valuable, especially since there is no excess cash to pay dividends to lower the investment income tax.
I just saw your note you are retiring. Congratulations! I do hope you keep up with your blog, even at a reduced frequency.
I always seem to learn something when I stop by!
Hi Anon - an ABIL is worth the same 25% tax savings as a capital loss but can also be deducted against regular income, which a capital loss cannot. In the end you may just want to use the ABIL/capital loss against your capital gains as you note. However,speak to your accountant, ABIL's are complicated and the answer to your question is fact specificReplyDelete
Thank you again - I will !Delete
Best wishes for a happy and healthy New Year!
is the 50% cap gains exclusion changes retroactive or a date is announced ahead? I mean for example for paying exit-departure tax.ReplyDelete
Hi Anon, typically the date is the budget date, but it could be retroactive, but that would be the exception historically.ReplyDelete