Tax-loss selling: One of the most popular year-end tax-planning strategies is tax-loss selling, which can help you reduce your capital gains tax. Particularly with the recent strong performance in the Canadian stock market, you may have significant taxable capital gains, triggered by selling stocks at a profit. Half of your net capital gain is taxable at your marginal rate.
However, you can offset your capital gains with capital losses. While no one likes selling a stock at a loss, it can make sense when the stock no longer meets your investment objectives - and you can use the loss to reduce your taxes. Your advisor can help you identify which stocks are suitable candidates for tax-loss selling.
Key dates: For Canadian tax purposes, a sale takes place on the "settlement date" - normally three days after you initiate the sale.
If you are considering a tax-loss sale, make sure you allow enough time for the transaction to settle in 2006.
Offsetting gains: Capital losses have to be used to offset capital gains in the current year first.
If the losses exceed the gains, then you can apply the excess amount against capital gains in the three previous years (2003, 2004, or 2005) or you can carry it forward indefinitely. Simply selling a stock to trigger a loss, then buying it back within a certain timeframe is considered a "superficial loss" by Canada Revenue Agency, meaning the loss will be denied, but added to the cost of the repurchased security.
A superficial loss occurs when:
1. You sell a security, including stocks and mutual funds, at a loss
2. You either purchase or repurchase the same security in the 30 days before or after the sale, counting from the settlement date
3. You still hold the security 30 days after the sale The superficial loss rule also applies, among other situations, when your spouse or a corporation controlled by either you or your spouse acquires or reacquires the same security 30 days before or after the sale.
Defer realizing capital gains: By waiting until the new year to realize capital gains, you can delay paying the capital gains tax until April 30, 2008, unless you have to pay tax installments.
If you sold a security for a capital gain at the end of the year, you would have to pay the tax by April 30, 2007.
Waiting until the new year can also potentially reduce your capital gains tax, if you expect your marginal tax rate to be lower in 2007 compared to 2006.
It can also help you make the most of tax-loss selling, in situations where you have paid capital gains tax in 2003, 2004 or 2005. If you have capital losses in 2006, those losses have to be applied against gains realized in 2006 before they can be carried back to the three previous years.
By waiting to realize capital gains, you can now utilize more 2006 losses against capital gains in the prior years.
- This article is supplied by Paul Russell, CFP, FMA, an Investment Advisor with RBC Dominion Securities Inc. Member CIPF. This article is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. Paul Russell can be reached at 329-1313.
