I own a few stocks that have dropped in price and I want to sell them to claim the capital loss for tax purposes. Is there anything I should be aware of before I pull the trigger?
Tax-loss selling, also known as tax-loss harvesting, can be an effective way to lower your tax hit.
But you have to follow the rules or you could find yourself on the wrong side of the Canada Revenue Agency.
With the end of the year approaching, now is a good time to brush up on your knowledge. First, we'll cover the basics. Then we'll get into some specific dos and don'ts.
What are the benefits of tax-loss selling?
It's all about reducing your taxes. When you sell a security that has dropped in price since you bought it, you can use the capital loss to offset capital gains that you may have.
You must first apply the loss against capital gains in the current year.
You can then carry back any remaining capital losses for up to three years, or forward indefinitely, to offset capital gains in other years.
Tax-loss selling only applies to non-registered – i.e., taxable – accounts. If you have stocks that have lost value in a registered retirement savings plan (RRSP) or tax-free savings account (TFSA), for example, you cannot use those losses to offset taxable capital gains.
Can I buy back the stock right away?
No. When you sell a stock at a loss, you must wait at least 30 days before you repurchase it. Otherwise, it will be deemed a "superficial loss," which cannot be used to offset capital gains. The rule is intended to prevent people from selling and repurchasing simply to claim a loss. The 30-day rule also applies to other accounts controlled by you or your spouse, or by a corporation controlled by either of you. For example, if you sell a stock in a non-registered account and immediately repurchase it in your (or your wife's) TFSA or RRSP, the loss will be denied by CRA. The loss will also be denied if you purchase options on the shares you sold.
Is there any way around the 30-day rule?
Sort of. Say you want to sell a stock for a capital loss but you believe the company, or the sector, will rebound. Instead of repurchasing the same security, you could purchase a similar one immediately without running afoul of the 30-day waiting period. For example, if you are selling an oil producer to harvest the capital loss, you could purchase a different oil producer, or a diversified energy exchange-traded fund, before the 30 days are up. That way, you could claim the loss but still have exposure to the energy sector. There are limits to the strategy, however: If you sell an index ETF and purchase a different company's ETF that tracks the same index, the loss will not be allowed because the ETFs are considered identical in the eyes of the CRA.
Can I claim a loss when I transfer shares to an RRSP or TFSA?
No. Because you would still own the shares that you transferred, the loss would not be allowed. To claim a loss, you could instead sell the shares in your non-registered account, contribute the cash to your RRSP or TFSA, and then wait 30 days to repurchase the security inside the registered account (or immediately purchase a similar, but not identical, security). Keep in mind that if you transfer shares that have appreciated in value to your RRSP or TFSA, you must still report a capital gain based on the difference between your initial purchase cost and the market price of the shares at the time of the transfer.
When is the last day I can make a tax-loss sale?
For a sale to count in the 2017 tax year, the trade must occur on or before Dec. 27. Under new rules that came into effect in September, the settlement period for stock trades is two business days (previously, trades settled three business days from the trade date). As a result, a trade that is executed on Dec. 27 (a Wednesday) will settle on Dec. 29 (a Friday), which is the last business day before the end of the year.