Nov 11, 2022
Tax-loss selling can turn 2022 losses into 2023 gains
By Dale Jackson
Three ways the everyday Canadian can save money in a recession
Personal Finance Columnist, Payback Time
2022 is a year most stock market investors will want to put behind them. But there could be a silver lining in this year’s carnage for investors who dump their dogs before the year ends.
It’s called tax-loss selling and it brings an opportunity to use those equity market losses to recoup tax paid on capital gains in the past, or eliminate tax on capital gains in the future.
HOW TAX-LOSS SELLING WORKS
Tax-loss selling permits capital losses from equity investments to be applied against taxes paid on capital gains as far back as three years, or into the future indefinitely. Because half of capital gains in a non-registered trading account are taxed, half of capital losses can eliminate the taxes on capital gains dollar-for-dollar.
If you accumulated $10,000 in capital gains during last year’s market rally and claimed the required $5,000 as income, as an example, $10,000 in capital losses will get you a full refund.
If you haven’t paid tax on capital gains this year or the previous two years, those capital losses can be used to lower or eliminate tax on capital gains at any point in the future.
SEPARATING THE DOGS FROM THE SLEEPING GIANTS
Any qualified tax expert will tell you to never make investment decisions based solely on tax implications, and deciding what to sell for tax-loss selling is no different.
Even good stocks fall in a broad market dip and the last thing you want to do is dump a stock that is poised to take off. That’s why it’s important to formulate a strategy well before the end of the year. A qualified advisor can help separate the sleeping giants from the dogs.
One thing to keep in mind: U.S. equities have taken a far bigger hit than Canadian equities so far this year, but the U.S. dollar has strengthen considerably against the Canadian dollar. Losses can be tempered by selling U.S. dollar denominated equities and converting the cash to Canadian dollars.
BEWARE OF THE SUPERFICIAL LOSS RULE
As with any tax strategy, the Canada Revenue Agency (CRA) has strict rules when it comes to tax-loss selling.
The most important is called the superficial loss rule, which prohibits the repurchase of the same stock within 30 days of the tax-loss sale. The superficial loss rule applies to repurchases in any registered or non-registered account in the name of the account holder, and even the account holder’s spouse. If you want to repurchase the same stock you must wait at least 31 days from the sale.
USING A TFSA AND RRSP FOR MORE TAX SAVINGS
It’s important to note that tax-loss selling, or tax on capital gains does not apply to investments in registered accounts, including a registered retirement saving plan (RRSP) or a tax free savings account (TFSA).
The tax savings from tax-loss selling, however, can generate further tax savings by shifting the proceeds from a non-registered account to registered accounts.
While half of capital gains are taxed in a non-registered account, the tax on capital gains in a TFSA is zero. Capital gains in a RRSP are fully taxed when withdrawn in retirement, along with income and original contributions, but investors are permitted to deduct their contributions from their taxable income.
RRSP contributions made before March 1 can be deducted from 2022 income or carried forward to future years when your tax burden is heavier. With both the RRSP and TFSA, capital losses don’t apply from a tax perspective because capital gains are never directly taxed in the first place.
There are other specific rules set out by the CRA for tax loss selling and contributing to registered accounts, which must be followed, so consider speaking with a tax professional.