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Year-end a good time to tick financial checklist

‘I know it is a bit of work for Canadians, but it might be time to go into the filing cabinet or the shoebox and pull out your last three years of tax assessments,’ says Andrew Pyle, wealth adviser and associate portfolio manager with ScotiaMcLeod.

Yvonne Berg/The Globe and Mail

Stressed about the money-losing investments in your portfolio? Look for the silver lining. There may be some value in those losses.

As year-end approaches, it's a good time for investors to review their holdings with a view to maximizing tax advantages, financial advisers say.

"If they have realized any gains on their investments, this is the time of year to look through the portfolio and see if there are any losses that they can take before the end of the year, because those capital losses can offset some of those gains and lower their tax bill," says Andrew Pyle, wealth adviser and associate portfolio manager with ScotiaMcLeod.

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Capital losses are generated by selling securities or mutual fund units for less than the costs at which they were acquired. Losses must first be applied against capital gains from sales of securities in the current tax year.

But any additional losses can be carried back three years to offset any capital gains in those years and recover some of the taxes already paid, ScotiaMcLeod notes in a primer on year-end tax planning considerations. Capital losses can also be carried forward indefinitely and be applied to offset capital gains generated in the future.

"I know it is a bit of work for Canadians, but it might be time to go into the filing cabinet or the shoebox and pull out your last three years of tax assessments," Mr. Pyle says.

"Accountants do your taxes, and they see all these things going on when you file, but they don't necessarily know what is going on in your investments," he says. If your accountant has a handle on the capital gains taxes you have paid in the past three years – in addition to knowledge about your current portfolio – he or she will be in a much better position to say "let's take a look through and see if there are losses that we can sell and take advantage of this year," Mr. Pyle says.

"Year end is a good time for people to set a day or whatever, create a financial checklist of things to do, make sure everything has been done and take a look at your rebalancing, if it hasn't been done during the year."

In order to reduce the tax bite, investors might look at deferring sales of securities with gains until the beginning of the next tax year, ScotiaMcLeod advises.

They might also want to consider delaying the purchase of fixed-income securities such as one-year treasury bills or annual pay guaranteed income certificates until 2013, thereby deferring taxation of the income by a year.

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Investors should keep in mind that – to benefit from tax-loss selling strategies in the current tax year – the sale must be completed before year end, allowing time for the transaction to clear, says Adrian Mastracci, Vancouver-based portfolio manager with KCM Wealth Management Inc.

"Start with the losers that have the worst prospects," Mr. Mastracci writes in his 2012 year-end planning checklist.

Certified financial planner John DeGoey, vice-president and portfolio manager at Burgeonvest Bick Securities Ltd., says investment planning should always be done in the context of the investor's overall financial plan. "Investment planning and financial planning are often seen as being separate entities.

"Look at both sides of the coin when making decisions – not just the opportunity of what you can make, but also, from the financial planning perspective, the tax consequences of certain dispositions."

Financial advisers say the tax aspect is often treated as an afterthought, with investors relying on last-minute contributions to tax shelters, such as Registered Retirement Savings Plans, to reduce income taxes. RRSPs, Registered Education Savings Plans and Tax Free Savings Accounts are all valuable savings vehicles and the tax advantages are widely recognized, while the rules around such strategies as tax-loss selling are less clearly understood.

For instance, investors cannot sell an underperforming security one day and buy it back the next and have Revenue Canada recognize the sale as a capital loss. "There has to be an investment case for selling it and you need to wait 30 calendar days before you buy it back, otherwise that loss will be disallowed," says Mr. DeGoey, author of The Professional Financial Advisor III.

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What investors can do, however, especially if they are dealing in mutual funds or exchange-traded funds, is sell the losing investment for the tax loss and buy a similar product. "You are basically buying the same thing, but it has a different ticker symbol and, for CRA's tax purposes, you can buy one and sell the other on the same day and you are not caught in the 30-day trap. This is especially important for people who want to stay in the market, and think the market is going to go rocketing up in the next 30 days."

Mr. DeGoey has no strong feelings on what time of year investors should consider rebalancing their portfolios, but they should go through the exercise at least once a year to make sure their asset allocation still matches their needs and their risk tolerance.

"But remember, from a financial planning perspective and a tax planning perspective, if you are in a taxable account, every time you sell to do a rebalancing, you are either triggering a capital gain or a capital loss, and every time you sell, you are incurring a brokerage fee. Whereas, if you can minimize your trading, and rebalance by just buying low and selling high to the greatest extent possible, that would be more efficacious in my opinion," Mr. DeGoey says.

Mr. Pyle is of the view that investors should look at their portfolios at least twice a year and tweak if necessary. "If it hasn't been done during the year, now is a great time to do it. …We have had a good year in the stock market [in 2012].

"But if the doomsayers are right, if the markets are not going to be so hot – for example – it might be a situation where you do not want to go into next year with too much equity in your account. Maybe this is the time to look at that and do some rebalancing."

Mr. Mastracci says a portfolio can be rebalanced any time, "but I prefer the rebalancing when you put money in or your take money out." The decisions should not be rushed, he says.

"I usually tell the clients, don't wait until Dec. 15, when tax loss selling sort of kicks into place. If you should sell something, you can sell it throughout the year, you don't have to wait until December.

"That way, you get to make a better decision, a less cluttered decision, you are not up against a deadline anywhere."

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