Investment Losses Can Help Your Tax Bill

Markets are up on the news that calls with China went well according to US president Donald Trump.  Oh wait, markets are down as China claims no such calls have taken place. If you've been paying attention to the global trade war between the two largest economies in the world, I'm sure you're a little tired of the constant back and forth. Unfortunately, neither of us have a say in the matter. With all the political posturing there's been a fair bit of up and down movements in global markets.  

Using Volatility to Your Advantage

If you're a business who's looking to invest money into manufacturing facilities, new product development, hiring new employees, or setting up a supply chain, you want to know your costs before doing so.  This is nearly impossible to do with tariffs going up, down or sideways depending on the latest tweet. With uncertainty comes volatility. If you're an investor who is utilizing a non-registered investment account (cash, margin, corporate accounts etc.), volatility can be used to your advantage.

You'll know that every time you sell an investment that's up in value, you're hit with a capital gain which adds more tax to your tax bill at the end of the year (50% of your gain is taxed at your marginal tax rate).  What investors often forget is that selling investments with losses can also put money in your pocket in the way of tax savings. In our profession we call it tax-loss selling.

What is tax-loss selling?

Tax-loss selling occurs when you deliberately sell an investment at a loss in order to offset capital gains in hopes of reducing taxes you pay.  Capital gains realized in 2019 ultimately can be offset if you have losses that can be locked in by selling the investments.  It's also important to note that these losses are able to be carried back for the previous three years (2018, 2017, 2016) to offset any capital gains that occurred in any of those years. They can also be carried forward indefinitely to offset any capital gains in the future.

In what circumstances can tax loss selling be a good idea? If you're looking to sell investments this year that have capital gains, you can look though your portfolio for some capital losses that can help offset the gains.Looking for a refund from a previous tax year where you had large capital gains?  Maybe you sold a property last year that added to your tax bill.  At the time markets may have been good but now you have investments that are down in value.  Capital losses can be carried back to get some tax back from the property sale. Tax-loss selling can be used as a deferral strategy.  You might trigger a loss today because you know next year you'll have a large capital gain.  

If you wait to sell the investments they may recover, leaving you with no way of offsetting the future gain.  Sometimes in investing you end up buying something and things really don't go as you hoped or had foreseen.  Selling the investment can help you move on and provides you a way to offset future gains. Be aware of the 'superficial loss rule' There are times where the investment you're selling is actually a business you do want to own long term.  You can always purchase it back.  In this case you need to be aware that if you or an affiliated person (example spouse, corporation you own, trust where you have an interest, including RRSPs) purchases the 'identical investment' within 30 calendar days after the sale date, the capital loss will be denied and the cost base is added to whomever repurchased the investment.  

If you do want to own the company that you're selling, you'll need to wait 31 days from the sale date in order to avoid the loss being denied for tax purposes. Communicating with client's accountants is a best practice of ours as mistakes can be very costly.  Although I've provided a general overview of tax loss selling, it can be more complicated than I have described.  It should go without saying that anytime you're dealing with tax planning that you speak with your advisor to ensure the particular strategy being used is right for you.

- Brandt Butt, Investment Advisor

Brandt Butt is an Investment Advisor at award winning firm Endeavour Wealth Management with Industrial Alliance Securities Inc. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Brandt Butt who is an Investment Advisor for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.