End-of-Year Tax Loss Selling Season Is Upon Us

10 December 2020 by National Bank
End of year tax-loss selling

With the end of the year fast approaching, and our holiday plans looking a lot different than last year, one task that hasn’t changed is reviewing our investments.

Tax-loss selling as a tax strategy

Stock markets around the world experienced historic pandemic-induced volatility in 2020, and Canadian Equities were no exception. Looking back, since the March lows and the recent good news about vaccines becoming available in 2021, many equities still have negative returns for the year. In fact, the accompanying chart indicates that out of the 221 stocks that comprise the S&P\TSX composite, 118 or 53% suffered losses.

Graphic S&P/TSX Composite Index Price Returns

Like many investors, if you took advantage of the correction to trade securities or if you’ve taken profits by selling them, you may have capital gains to declare.

If you happen to hold investments in a non-registered account that, when sold, would create a capital loss, this takes on added importance because of the fiscal impact of such transactions and the possibility of decreasing or even eliminating your capital gains through tax loss selling.

Tax loss selling, also known as tax loss harvesting, is a tax strategy designed to minimize capital gains by selling securities (e.g., stocks, ETFs, mutual funds) that have decreased in value to create a loss, which can then be used to offset capital gains. 

As an example:

You’ve sold a security in 2020 and realized a capital gain. You also hold another security whose value has dropped, and you do not expect it to recover in the near term. You can sell it to create a capital loss that can offset some or all of the gain. 

If the tax-loss is greater than the capital gains realized during the year, you can carry back any remaining capital losses for up to three years to offset previous gains or carry them forward indefinitely for future use. The goal in applying this strategy is to minimize the amount of tax payable on the 50% of the capital gain that is taxable or, in the case of a retroactive application, to reclaim taxes already paid.

In order for the loss on a security to be available for the 2020 tax year, the transaction needs to settle this year, which means:

  • The trade date must be no later than December 29, 2020.
  • The Canada Revenue Agency (CRA) also imposes “superficial loss rules” which investors need to take into consideration. If you have the intention of repurchasing the security, you must wait at least 30 calendar days before doing so or else the loss will be disallowed. This applies to all accounts controlled by you (you can’t repurchase the shares in any of your accounts within that period) or affiliated to you (your spouse can’t purchase those shares either during that period).

However, if you expect that there will be a rebound in the security during this period, you can still benefit from it by purchasing a similar security or an ETF that tracks the sector.

Lastly, if you intend to use this strategy with US securities, it’s important to consider the currency fluctuations as well, because the loss could be lower than expected—or even be nonexistent—if the US currency has appreciated versus the Canadian dollar.

If you have additional questions, you may contact the CRA or your tax professional.

Happy Holidays!

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