As we are nearing the end of 2024, it’s a great time to review your financial situation in order to identify potential tax opportunities. One opportunity is to see if tax loss selling (also known as tax loss harvesting) makes sense for your investment portfolio.
During a positive year, several rebalancing trades may have occurred resulting in realized capital gains accumulating. When this happens, it is time to look closer at tax loss selling for the current year to reduce realized capital gains and possibly creating a net capital loss which may be carried back to 2021, 2022, or 2023.
The purpose of tax loss selling is to reduce current year taxes or to recover taxes paid in the previous three years. At the end of every year, investors may consider whether or not to sell assets with an accrued capital loss to offset capital gains already realized in the current year. In an event that the losses exceed capital gains in the current year, a “net capital loss” is created. Net capital losses can be carried back up to three years or carried forward indefinitely to offset future capital gains.
In order to determine if a tax loss strategy is appropriate, you should speak with both your Portfolio Manager and tax advisor. A starting place is to gather the following pieces of tax information:
• Unused net capital loss carry forward information, per your most recent Notice of Assessment.
• Taxable capital gain information for 2021, 2022 and 2023.
• Your personal income tax returns for the above noted years.
• Realized capital gains (losses) for 2024 from selling non-registered investments including stocks, bonds, mutual funds, exchange traded funds, real estate and certain other assets (i.e. personal use property that may have appreciated in value) — essentially, a year-to-date preliminary realized gain (loss) report from January 1st to now.
• Listing of unrealized capital gains and losses on your non-registered investments (those investments that you still own and have not yet sold).
The following is a quick list of items to factor in when looking at your 2024 tax situation and non-registered investments:
• Dividend reinvestment plans should be factored in when determining an adjusted cost base of an investment for tax purposes.
• If you hold the same security in multiple non-registered accounts, you will have to calculate an average cost for tax purposes.
• Mutual fund distributions that typically occur at the end of the year and may include a capital gain component.
• Some investments have a return-of-capital component which reduces the original cost that you paid for it.
• Bonds purchased at a premium will create a capital loss at maturity and bonds purchased at a discount will create a capital gain.
• Investments denominated in a foreign currency should have a cost base that is converted to 91原创 dollars on the date of purchase.
• If you have any defunct or de-listed securities, determine if you have previously claimed the capital loss.
• Ensure you factor in any elections that you may have made (i.e. February 24, 1994 capital gains election).
The following outlines some general rules to adhere to before doing any tax loss selling:
• If you are selling a security to realize a capital loss, then you or an affiliated person (i.e. spouse, corporation) must not purchase the identical security within 30 calendar days - referred to as the superficial loss rule.
• Transferring assets that are in a capital loss position to your Registered Retirement Savings Plan (RRSP) (or similar accounts) or Tax-Free Savings Account (TFSA) as an “in-kind” contribution will violate the superficial loss rule and the loss will be denied.
• Confirm with your tax advisor whether to carry net capital losses back to the earlier years – sometimes carrying net capital losses forward to a future year may be more advantageous.
In order to claim a loss on an investment, legal ownership must transfer in the same calendar year. Two terms to remember are trade date and settlement date.
Trade date is the day that you or your Portfolio Manager actually entered the sell or buy order. Legal ownership has not transferred technically at that point.
Settlement date is the date in which legal ownership has transferred. In the past, investors in Canada would have to factor in different settlement dates for U.S. and 91原创 markets when looking at tax loss selling options near the end of the year. The primary reason for this is that the U.S. does not recognize Boxing Day as a holiday.
On May 17, 2024, we wrote an article T + 1 Settlement is coming to Canada. Effective May 27, 2024, the markets in Canada and Mexico shortened the settlement cycle for most securities from two business days after a trade (T+2) to one business day following a trade (T+1). U.S. markets moved to T+1 settlement on May 28, 2024.
Most security transactions now only take one business day to settle after the trade is entered. For the 2024 income tax year, the last trading day to settle a trade in the calendar year for both 91原创 or U.S. stocks is Monday, Dec. 30, in both Canada and the U.S.
For capital gains realized after June 24, 2024, the capital gains inclusion is effectively one-half on the first $250,000 of capital gains earned in the year. Capital gains on amounts over $250,000 are taxed at two-thirds.
If clients have accumulated substantial unrealized capital gains, then we may not do tax loss selling in some situations. Balancing deferral and final estate taxes are key on determining whether to purposely realize capital gains at one-half while alive, as opposed to having a greater portion taxed at two-thirds as part of your estate.
Speak with your Portfolio Manager and Tax Advisor for further discussion and analysis regarding whether to do tax loss selling and whether realizing capital gains early when implementing any tax planning strategies.
Kevin Greenard CPA CA FMA CFP CIM is a Senior Wealth Advisor and Portfolio Manager, Wealth Management with The Greenard Group at Scotia Wealth Management in Victoria. His column appears every week at timescolonist.com. Call 250.389.2138, email [email protected], or visit .
