We hear a lot about tax-loss selling at this time of the year. But for the bulk of Canadians who invest in their registered retirement savings plans and tax-free saving accounts, the tax-saving tool does not apply.
It’s a blessing in disguise because tax-loss selling is a way to recuperate capital gains taxes – and the capital gains tax is not applied to RRSPs and TFSAs.
For investors with equities outside RRSPs and TFSAs, and contribution space to spare, there is a way to take advantage of both tax breaks.
First, it’s important to know how tax-loss selling works. Any capital loss incurred during 2016 in a non-registered account can be applied against capital gains in a non-registered account going back three years or forward indefinitely. In other words, if you have a money-losing stock, the loss can help wipe out taxes you paid on other stocks that gained.
Now, for the second tax windfall. Contribute the cash from the sale of the losing security into your RRSP or TFSA and invest from that account. If the stock goes up in value, you do not have to pay a capital gains tax.
If it is in an RRSP you can deduct the full contribution amount from your 2016 taxable income or carry it forward to use in future years when the tax saving could be greater. While the investment can grow tax free for several years, it’s import to know that the original contribution and gains are fully taxed when withdrawn – preferably in a low tax bracket in retirement.
If a stock is purchased in a TFSA the contribution cannot be deducted from taxable income, but the gains it makes through the years are never taxed.
There is one important restriction: If you wish to repurchase the same security from a tax-loss sale (whether it is inside or outside a registered account) you must wait at least 30 days or the Canada Revenue Agency will consider it a superficial loss.