Tax Loss Harvesting after Covid-19 - Kerr Financial
Accounting & Tax
Tax Loss Harvesting after Covid-19
Category: Accounting & Tax, Financial Planning, Investment Management Tags: integrated wealth management, investment management, Superficial Loss, Tax, Tax Loss Harvesting, wealth management

Opportunity with Tax Loss Harvesting

When there is a decrease in asset prices there may be a tax planning opportunity in the form of tax loss harvesting, also know as tax loss selling, that can save you taxes.

What is tax loss harvesting?

Tax loss harvesting is usually completed in two parts with the goal of saving money on taxes. The first part calls for you to purposely sell an investment that has gone down in value so that you can trigger a capital loss. The second step is to buy a similar investment so that you can continue to be invested in the market and thus, participate in the future growth.

The benefits of tax loss harvesting

A loss triggered from tax harvesting can save you taxes as is can be used to offset gains in the current tax year, the three previous taxation years, or be carried forward and be applied to future gains.  All the while you have replaced the sold security with a similar one and continue to participate in the market upside.

3 Steps to consider when tax loss harvesting:

  1. When replacing the sold security with a similar one it is important that you do this in a timely manner so as to avoid any market timing risk. In volatile markets this become difficult but not impossible.
  2. Tax loss harvesting is sometimes done towards the end of the calendar year in order to offset gains in that year.  In such a circumstance, one must monitor end-of-year deadlines for completing a tax-loss sale to ensure that the transaction is finalized in time to apply to the current tax year.
  3. Avoid creating a superficial loss as defined by the Canada Revenue agency. This means that you cannot deduct the loss if you purchase an “identical security” within 30 days of the settlement date of the transaction.  Moreover, “affiliates” cannot immediately purchase an “identical security”.

The Canada Revenue agency defines “affiliates” as:

Your other investment accounts

Any type of investment account owned by your spouse or common-law partner

A trust or corporation in which you or your spouse or common-law partner have a financial interest

The Canada Revenue identifies “identical securities” as shares of the same company, units of the same ETF or mutual fund, or a competitor ETF or mutual fund that invests in the exact index that you just sold.

 

Work with your advisor:

Throughout the process it is important that you work closely with your financial planner on an ongoing basis in order to determine if you can benefit from tax loss harvesting.

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