How to take the sting out of current year investment losses
Another year is coming to a close. It was a tough one in the investment markets and unfortunately, as we know, uncertainty still lies ahead.
Review your investment holdings now
Not all is lost if you experienced some of the market volatility. If you did incur losses, you may be able to put those to work for you. This would be a good time (before the end of the current year) to see if you and/or your investment advisor have investments in your portfolio that are in a loss position. Reviewing those holdings to determine if now is the right time to sell is the first step. There are some other things you will want to keep in mind.
The sale of an investment that has dropped in value below its book value, will generate a capital loss. Such losses can be used to deduct against current year capital gains. If you do not have any gains this year, you have the option to carry them back for 3 years to apply against prior years’ capital gains or, you can carry the losses forward to apply against future gains.
If you did have capital gains in the prior 3 years, you will want to make sure you had taxes payable and that your income and taxes were not offset by other deductions and/or credits – no sense in carrying back a loss back if there is no benefit. Given that you can carry losses back 3 years, you would carry back against the capital gains in the furthest year (2019). This application of losses is completed when you file your taxes. If the loss carry back is approved by CRA, you will receive a Notice to confirm it, along with your refund.
Superficial loss rules
Another important requirement for the losses to be eligible for the above strategy, is staying on side of the “superficial loss” rules. These rules outline the requirement to stay out of a holding for at least 30 days for the capital loss to be allowed. If not, the capital loss will be considered a superficial loss and will not be available to apply against your prior capital gains. The rules state that you, or, a person affiliated with you, do not own the identical property for 30 days. This is also known as the 30-day rule. An affiliated entity could be your spouse or common-law partner, a corporation controlled by you or your spouse or partner, or a trust which you or your spouse or partner are majority interest beneficiaries.
Consider your investment outlook
As helpful as the above planning is, to offset the sting of a loss in your portfolio, you should ensure you consider the investment outlook along with the tax benefit. Given the volatility in the markets, you will need to consider if now is the right time for you to be out of a position for 30 days. Or you might want to acquire an equivalent security during this freeze period. Something to discuss with your investment advisor.
These are all good items for you to consider as we approach year end. The transaction must occur in the current calendar year to be available to capture on your 2022 tax return.