The Globe and Mail

I recall visiting a casino a few years back with Marty, a friend of mine. Now, I'm not a gambler, but I did lose 20 bucks on the slots that day, after about 20 minutes of playing. So, I waited for Marty near the entrance to the casino. An hour later, Marty finally returned to the front with a bag full of coins.

“Looks like you won big-time,” I said.

“Oh yeah,” Marty replied. “I found an amazing machine in the back corner,” he continued. “Whenever I put a loony into the machine, I got four quarters back!”

No one ever accused Marty of being a rocket scientist. But I tell you, many investors today would be glad to do as well as Marty when it comes to their portfolio. Breaking even is not such a bad proposition in today's environment. If you're like most, though, you've probably suffered some declines in value in your portfolio. So, how do you make the best of a bad situation? Let me share five ideas for those capital losses you might have.

Transfer losses to your spouse.

If you have capital losses but no capital gains this year or in the prior three years against which to apply those losses, you may be able to transfer unrealized capital losses to your spouse.

How? First, you can trigger the capital losses by selling an investment that has dropped in value. Next, your spouse should acquire the same securities on the open market (within 30 days of your sale).

This will cause your capital loss to be denied as a result of the superficial loss rules. But the loss doesn't disappear forever. Under Canadian tax law, it's automatically added to the adjusted cost base of the securities acquired by your spouse.

Finally, your spouse can sell the same securities (after the 30th day from the date of your sale) and realize a capital loss that he or she may be able to use. See my article dated Oct. 28, 2006, at www.waterstreet.ca for a detailed example.

Complete a debt swap.

If you have debt on which you're not able to deduct your interest costs, consider selling some of the losers in your portfolio to free up some cash. You won't face tax if the securities have declined in value since you acquired them. Then, use the cash to pay down your non-deductible debt. Finally, reborrow to replace the investments you just sold.

The total amount of your debt will remain unchanged, but you should be able to deduct your interest costs if you're investing to earn income. Keep in mind, you may want to delay investing the newly borrowed money until the volatility in the market subsides.

Donate to charity.

Donating securities to charity that have appreciated in value makes sense today since any accrued capital gain on donated securities will escape tax thanks to the 2006 federal budget.

On the flip side, donating your losers to charity can also make sense since the charity will receive the value of the securities, you'll receive a donation receipt for the fair market value of the securities on the date of the donation, but you'll also have capital losses that can be applied against capital gains realized this year, in one of the three prior years (2005, 2006 or 2007), or in the future.

Make a gift to the kids.

When you transfer assets to your kids, you're deemed to have sold them at fair market value, which will often trigger a tax hit when the assets have appreciated in value. But if you transfer securities that have declined in value, you'll realize capital losses that can be applied against capital gains this year, in the prior three years, or in the future. Making this gift can be a good estate planning tactic; as those assets appreciate in value in the future, those capital gains will accrue to your kids, and not you, which will reduce your own tax liability on death, if not before.

Trigger capital gains.

There may be no better time than now to sell some of your securities that have appreciated in value, even if you like them. You see, you can also sell some losers so that the capital losses offset the capital gains on the winners you choose to sell. If you then reinvest in those same winners, even right away, you'll have a higher adjusted cost base (ACB) in those securities than you had before. You will have accomplished this “step-up” in ACB without incurring any tax thanks to your capital losses.