Personal Investor: How to turn capital loss into tax gain
No one wants to admit they made a bad investment decision, but coming to grips with your own fallibility could pay off in tax savings.
If you’re one of the many Canadian equity investors looking to sell some of the dogs from a miserable first quarter, those losses can be applied against any capital gains over the past three years, or they can be banked up to offset capital gains in the future.
Here’s how it works: suppose you sold a stock that doubled in value for $200 in 2016. Half, or $50, of that $100 gain would have been taxed according to your personal rate in the 2016 tax year.
Suppose you sold a different stock that lost half its value for $50 this year. Half, or $25, of that $50 loss can be used to reclaim $25 of the capital gains tax paid back in 2016.
The practice is called tax-loss selling and it is often exercised in the last days of a calendar year to lower that year’s tax bill.
There are a couple caveats: First, if you want to repurchase the stock sold at a loss you must wait at least thirty days, otherwise it is considered a “superficial loss”.
Second, tax-loss selling does not apply to a registered retirement savings plan (RRSP) because capital gains do not apply to an RRSP. Gains on equities are fully taxed when withdrawn from an RRSP.
Third, tax-loss selling does not apply to a tax free savings account (TFSA) because capital gains are never taxed in the first place.