If you are not familiar with tax-loss selling, the concept is simple: sell the stocks that you own, which are currently at a loss position, to generate a capital loss for tax purposes. This capital loss can be used in the current period to offset capital gains, carried forward indefinitely and carried back to any of the three previous tax years – and deducted against capital gains of qualifying other years.
Important: the tax-loss selling deadline for 2016 is December 23
You may be wondering why the deadline is not December 31 – the last day of the year; this is because it takes 3 business days for the share sale to settle and the sale is only complete upon settlement. Here is what you need to know about tax-loss selling:
Know the Superficial Loss Rules
Often people think they can outsmart the tax system by selling a losing stock on the tax-loss date, and simply repurchasing it in the new-year. This makes sense, right? Get the capital loss this year, and just repurchase the stock later (hopefully at an even lower price). The Canada Revenue Agency (CRA) is well aware of these tactics, and has a rule to prevent this – the “Superficial Loss” rule.
Superficial Loss Rule: if a stock is sold at a loss and subsequently repurchased within 30 days, it is considered a superficial loss, and the capital loss is denied.
Transfers to RRSP or TFSA Accounts
If you don’t want to sell your losing stocks, and would rather simply transfer them in-kind to a registered account such as a TFSA or RRSP account, you can do that; however, any capital loss generated will be denied.
When shares are transferred from a non-registered account to a registered account, the CRA considers this a deemed sale at fair market value; if you have a gain, the capital gain will be triggered and will need to be included in your taxable income that year. However, if the deemed sale at fair value generated a loss, that loss is denied.
What are some other tips?
Tip 1: Avoid the Superficial Loss by Purchasing a Competitor Stock
Assuming you believe that the shares you hold will eventually go up, and the sector in which they operate will do well – one method of preventing the superficial loss from causing a denial of your capital loss would be to sell your “losing” stock and replace it with a competitor’s stock. For example, let’s assume you are in a loss position on your Telus shares, you can simply sell those shares for the tax-loss and repurchase Bell Canada shares at any point, with no superficial loss rules to worry about.
Of course, you should do your own research and work with your financial advisor to ensure this is a good investment decision, we are only providing tips from a tax perspective.
Tip 2: Be Careful with Index Exchange Traded Funds (ETFs) and the Superficial Loss rules
It is possible that you read tip 1 above and decided that you would sell one of your index ETFs and re-purchase an ETF under a different ticker, which tracks the same index – unfortunately, that is still a superficial loss and your loss will be denied.
Tip 3: Swap Sector ETFs and avoid the Superficial Loss rules
Selling and re-purchasing two different ETFs that track the same index will trigger a superficial loss; doing the same thing with ETFs that track the same sector will not be considered a superficial loss. The reason for this is that index ETFs are all essentially identical; however, sector ETFs are not as the securities they hold will vary (in proportion, and companies held) from ETF to ETF.
Tip 4: Check with your Chartered Accountant before you sell
Although we have generally outlined the rules above, there are many other tax rules to consider and it is always best to check with your Chartered Accountant before making decision that impact your income tax return.