Consider Tax Loss Selling
BMO Financial Planning Group
As another year comes to a close, and you review your investment portfolio looking to make adjustments, you should also take the time to calculate your net capital gains and losses realized for 2007.
Why? If your net capital gains exceed your losses, and you don't have previous unutilized losses available to offset the gains, you may want to consider a tax loss selling strategy before December 24th - the last day that a security can be sold on a Canadian exchange for 2007 income tax returns - to reduce your current tax bill.
However, before you consider this tactic, it is important to remember the rules surrounding tax loss selling, in particular the superficial loss rules.
The superficial loss rules deny the loss if an "affiliated person" acquires an identical property during the 30-day period both before and after the sale. If the superficial loss rule is triggered, the capital loss realized on the sale is denied and the amount of the loss is added to the cost of the substituted property.
An affiliated person includes you, your spouse (or common-law partner), a corporation that you or your spouse controls, or a trust in which you or your spouse are a majority interest beneficiary, including an RRSP. This rule also applies to any additional purchases of existing holdings made in the 30 days prior to the disposition.
For example, you own a security that was purchased at $100 and later sell it for $30. This would result in a $70 capital loss, which may be used to offset capital gains. If your spouse purchases the same investment within 30 days of your sale, the superficial loss rule is triggered and you cannot claim the $70 capital loss. Instead, the denied loss is added to your spouse's cost base so that the "new" cost base is the amount paid for the security plus the $70.
The superficial loss rules can easily be avoided if the repurchase is made outside the 30-day period before or after the sale; or if the security is repurchased by a child, grandchild or parent of the seller. Alternatively, a similar, but not identical, security can be purchased.
While tax minimization is a concern for most investors, it should not be the primary consideration when making an investment decision. Your risk tolerance and long-term investment goals must be taken into account when making adjustments to your portfolio. Nevertheless, selling a security at a loss for tax planning purposes warrants consideration. And finally, as with any tax-related matter, you should consult a professional tax advisor regarding your particular situation.
