Tax Loss Selling

Selling assets and realizing the capital gains from the sale is always something that you, as an investor, strive for. But what to do with assets that if sold would generate a loss? You can turn that loss into a win through tax loss selling.

If you have sold some assets and realized capital gains in the year, and you are holding other assets with unrealized losses, consider selling them as well. This will allow you to realize losses to offset the capital gains. This is often referred to as "tax loss selling." Tax loss selling usually takes place at year-end, when an investor knows his or her net taxable capital gains for the year. Capital losses realized during the year offset capital gains realized during the year for a net capital gain or loss. A net capital gain is taxable in the year. A net capital loss may be carried back three years or forward indefinitely to apply against net capital gains.

With tax loss selling, the selling transaction must settle before the last business day of the year. (Given a three day settlement period, implies the deadline is before Christmas Eve, but why push it?) In addition, you should be aware of the superficial loss rules. For example, do not repurchase the losers within 30 days before or after the sale; alternatively, consider repurchasing similar, but not identical, securities.

Superficial Loss Rules

If you sell a security to trigger a loss, and you or an affiliated person (for example, your spouse, a corporation you control, or a trust where you have a major beneficial interest, including an RRSP) purchases an "identical security" within 30 calendar days before or after the sale date, and that person still owns that security 30 calendar days after the sale date, then the capital loss is denied to you and added to the cost base of the person who bought it. This rule also applies if you or the affiliated person buys an option or a right to buy the security that was sold.

For example, shares of competing companies within an industry should not be considered "identical securities," while index funds which track the same index would be considered "identical securities," for purposes of the superficial loss rules. In addition, professional tax advice will be needed to determine whether similar mutual funds are "identical securities."

Please note that the capital loss will be denied if the buyer of the property is an RRSP under which the seller or seller's spouse (or common-law partner) is the annuitant. Therefore, swapping or contributing eligible securities to an RRSP will result in the denial of a capital loss, even though accrued capital gains would be taxable.

Given the complexities involved, professional tax advice will be required in many cases.

Through tax loss selling, you are not at a complete disadvantage if you sell assets that generate capital losses - even they have their uses. Talk to your tax advisor, if you want more information on its benefits.

Use our Find An AdvisorOpens a new window in your browser. tool to locate a CIBC Wood Gundy Investment Advisor near you and take the first step to achieving the financial future you want.