For Canadian traders who’ve achieved important taxable capital beneficial properties, now’s the time to implement a tax-loss promoting technique—the best technique to discover tax financial savings.
What’s tax-loss promoting in Canada?
Tax-loss promoting is an investing technique designed to offset taxable capital beneficial properties and cut back your tax invoice. It includes promoting investments to set off a capital loss and claiming them towards capital beneficial properties.
Definition of tax-loss harvesting
Tax-loss harvesting, or tax-loss promoting, is a method for lowering tax in non-registered accounts. Traders promote money-losing investments, triggering capital losses they’ll use to offset capital beneficial properties incurred the identical yr. Tax losses may also be carried again three years or carried ahead indefinitely. When utilizing this technique to save lots of on taxes, take care to keep away from triggering the superficial loss rule.
Learn the total definition of tax-loss harvesting within the MoneySense Glossary.
Capital beneficial properties and capital losses
In Canada, if you promote considerable property akin to shares, bonds, treasured metals, actual property, or different property for greater than the acquisition worth of the funding plus any acquisition prices—a.okay.a. the adjusted value base (ACB)—that is known as a capital achieve.
The mathematics is fairly easy. When you purchased a inventory for $100 and offered it for $200, the capital achieve is $100. The Canada Income Company (CRA) requires you to report the capital achieve as revenue in your tax return for the yr the asset was offered. And, 50% of its worth is taken into account taxable, primarily based on the speed of your revenue tax bracket.
On this instance, the taxable revenue is $50 ($100 x 50%), which is taxed at your marginal tax price. The CRA doesn’t tax capital beneficial properties inside registered accounts akin to registered retirement financial savings plans (RRSPs) and tax-free financial savings accounts (TFSAs).
On the flip aspect, if you promote an funding for lower than its ACB, that is thought of a capital loss. The CRA permits Canadian taxpayers to make use of capital losses to offset any capital beneficial properties.
In contrast to capital beneficial properties, capital losses could be reported in your tax return in any of the three years previous to the loss or to offset future capital beneficial properties. Capital losses haven’t any expiration date.
As an funding advisor in Canada, I monitor my purchasers’ portfolios all year long to have a transparent view of their capital beneficial properties’ place and alternatives to reduce tax. That’s when tax-loss promoting comes into play.
