Understanding tax loss harvesting: tips and tricks

We are reaching the end of 2017 and for retail investors that also marks the end of another tax year. As we look forward to 2018, we prepare for tax time and dread it as we may, understanding the options is the best way to ensure investors are minimizing their taxes owing.

Tax loss harvesting

One tactic investors hear about during this time of year is tax loss harvesting. Tax loss harvesting is a method by which an investor purposely incurs capital losses to offset the taxes they would otherwise pay on capital gains. Essentially, the investor makes the best of a bad situation.

The process involves:

  1. Selling shares on which a loss has been incurred.
  2. Potentially reinvesting, if there is faith in that sector (or in a similar sector, but not too related as to not drastically alter their market exposure).  
  3. Claim capital losses incurred to offset capital gains on the tax return.

There are some important considerations to keep in mind prior to implementing this strategy:

Purchase a similar security: If an investor feels that the investment in which there has been a loss still has potential for growth in the future, it would be wise to reinvest in a similar security whose performance is close to the stock being sold.

Utilize tax loss harvesting as a secondary option: A primary investment plan should always take precedence.

Use capital losses for past and future returns: Losses must first be applied to 2017 taxes, but if the amount allows for it, they can also be applied to the previous three returns, or carried forward indefinitely.

Do not use this method for registered accounts: Successful tax loss harvesting can only be performed in non-registered accounts and may not be used for investments within a TFSA or RRSP.

Ensure this is not a superficial loss: CRA rules prohibit the rebuying of the same shares that were sold off to incur a capital loss right away. An investor must wait 30 days after selling a stock before repurchasing. This includes purchases made by a spouse and purchases made from different accounts owned by the investor.

Start early: Official transfer of shares occurs approximately three days after the trade is executed. Also, don’t forget that there are several statutory holidays near the end of December that impact trading dates. If using this tactic, it is best to do so before December 20.

Triggering losses to decrease capital gains taxes could be the right approach for you this tax season. Determining if this method fits your needs is one way we can help.

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