For Canadian traders who’ve achieved vital taxable capital gains, now could be the time to implement a tax-loss promoting technique—the best solution to discover tax financial savings.
What’s tax-loss promoting in Canada?
Tax-loss promoting is an investing technique designed to offset taxable capital features and cut back your tax invoice. It includes promoting investments to set off a capital loss and claiming them towards capital features.
Definition of tax-loss harvesting
Tax-loss harvesting, or tax-loss promoting, is a technique for lowering tax in non-registered accounts. Buyers promote money-losing investments, triggering capital losses they’ll use to offset capital features incurred the identical yr. Tax losses will also be carried again three years or carried ahead indefinitely. When utilizing this technique to avoid wasting on taxes, take care to keep away from triggering the superficial loss rule.
Learn the complete definition of tax-loss harvesting within the MoneySense Glossary.
Capital features and capital losses
In Canada, if you promote considerable property akin to shares, bonds, treasured metals, actual property, or different property for greater than the acquisition value of the funding plus any acquisition prices—a.okay.a. the adjusted cost base (ACB)—that is known as a capital acquire.
The maths is fairly simple. In case you purchased a inventory for $100 and bought it for $200, the capital acquire is $100. The Canada Revenue Agency (CRA) requires you to report the capital acquire as revenue in your tax return for the yr the asset was bought. And, 50% of its worth is taken into account taxable, primarily based on the speed of your revenue tax bracket.
On this instance, the taxable revenue is $50 ($100 x 50%), which is taxed at your marginal tax fee. The CRA doesn’t tax capital features inside registered accounts akin to registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs).
On the flip aspect, if you promote an funding for lower than its ACB, that is thought of a capital loss. The CRA permits Canadian taxpayers to make use of capital losses to offset any capital features.
Not like capital features, capital losses may be reported in your tax return in any of the three years previous to the loss or to offset future capital features. Capital losses don’t have any expiration date.
As an funding advisor in Canada, I observe my purchasers’ portfolios all year long to have a transparent view of their capital features’ place and alternatives to attenuate tax. That’s when tax-loss promoting comes into play.
