How Can I Take Advantage of Losses?
In our last blog, we spoke about the first thing to do during a market downturn – stay calm. Avoid shooting yourself in the foot by making drastic changes to your portfolio, and make sure you have a solid financial plan for your investments! The financial markets have historically always recovered, and there is no reason to think this time is any different. As long as your risk level is appropriate for your situation, maintain your portfolio’s exposure to the market, and even considering investing more to buy stocks on a ‘discount.’
While last week’s topic was on investor behavior, this week’s topic is a little more technical. Wherever possible, try to use tax losses this year. There is no tax benefit from declines in the market value of your investments unless you sell the asset, and assets that are sold at a loss but are inside a ‘registered account (TFSA, RRSP, RRIF being some of the main ones) still can’t be claimed for tax purposes. However, losses triggered on holdings in non-registered (or, taxable) investment accounts are called capital losses, and can be used to offset capital gains income. Don’t expect to have capital gain income in 2022? Capital losses can be carried back as many as three years and carried forward indefinitely, but only to offset capital gain income.
Sound easy? Well, it’s not. The investor has to plan and allow enough time for any stock dispositions to take place on or before December 31, 2022. On top of timing issues, there are several other nuances due to CRA rules. For example, transferring stocks to your RRSP directly would trigger a ‘deemed disposition’ and any capital gains would be recognized by CRA for tax purposes, but capital losses would be denied! If an investor thinks they can outsmart CRA by selling their investment to trigger a loss December 31 then but the stock back January 1, well this won’t work either, as CRA would determine this as a superficial loss.
Crystalizing tax losses can be very effective, but it can also be a complicated process, that takes time and planning to ensure losses are allowable and used most effectively for an investor’s unique financial situation. Done right, this process can save a significant amount of tax, but the help of a professional is recommended! Contact Stride Business Works for more information, a consultation, or for any questions on this blog!
Contributed by Dale Hein, CPA and Alex Hein, CFP