by Mike Jaczko and Max Beairsto
It’s time to clean up your investment pantry for tax-loss selling purposes.
If you own some old investments – “friends” like those pot stocks that tanked in September – now’s the time of year to say bye-bye!
Tax-loss selling is an investment strategy that can lower your tax bill. Interested in knowing more? Does this apply to your pharmacy business? Read on. This investment strategy kicks in when you sell a stock for a capital loss, so that you can use the loss to offset realized capital gains with a view to reducing the tax you ultimately pay.
There are some boundaries you must follow. For example, if you sell a stock for a loss in 2020, you must first use the loss to offset capital gains realized in 2020. Any unused net capital losses are allowed to be “carried back” for up to three years, or “carried-forward” indefinitely to offset capital gains in future years. Furthermore, this strategy is only applicable to “non-registered” taxable investment accounts and therefore not eligible for “registered” investment accounts like TFSAs and RRSPs. You must sell the shares on or before December 29th in order to take advantage of this strategy.
Further considerations relate to observing the minimum 30-day waiting period before you can repurchase the stock. This tactic would be deemed a “superficial” loss under the ITA (Income Tax Act) and as such you wouldn’t be allowed to use the loss to offset capital gains elsewhere in your investment portfolio. In addition, you can’t avoid the superficial loss rules by selling a security in your taxable account and immediately buying it back in your RRSP or TFSA investment account. In other words, you can’t get around the superficial loss rule by buying the stock back in a different account controlled by your or your spouse.
Finally, you can’t transfer a losing stock to your TFSA or RRSP and still get the tax loss because in such an event you are still maintaining control. Avoid the superficial loss rules by selling the shares and then subsequently contributing the cash to your TFSA or RRSP and then wait 30 days to repurchase the shares in your registered account.
Even risk-averse (conservative) investors tend to ride the value of their losers down until the value hits rock bottom, a phenomenon inconsistent with their characters known as “risk seeking behaviour.” Cut your losses short at this time of year as we head into the last two months of the investment trading year. Make the federal government your partner!
To learn more about whether you’re better off investing in RRSPs or TFSAs, read our column:
Mike Jaczko, BSc. Phm, RPh, CIM®, FEA, a pharmacist by background, is a portfolio manager, partner and member of KJ Harrison Investors, a Toronto-based private investment management firm servicing individuals and families across Canada. For more information on this topic, email firstname.lastname@example.org.
Max Beairsto, B.Sc. Pharm., MBA, CVA is a pharmacist and valuation analyst with Enterprise Valuators Corporation (EVCOR), an Edmonton-based business valuation firm that focuses on business valuations and sale advisory of small and mid-sized private companies. You can reach him at email@example.com