For Canadian traders who’ve achieved vital taxable capital positive factors, now’s the time to implement a tax-loss promoting technique—the best approach to discover tax financial savings.
What’s tax-loss promoting in Canada?
Tax-loss promoting is an investing technique designed to offset taxable capital positive factors and cut back your tax invoice. It entails promoting investments to set off a capital loss and claiming them towards capital positive factors.
Definition of tax-loss harvesting
Tax-loss harvesting, or tax-loss promoting, is a technique for decreasing tax in non-registered accounts. Buyers promote money-losing investments, triggering capital losses they will use to offset capital positive factors incurred the identical 12 months. Tax losses may also be carried again three years or carried ahead indefinitely. When utilizing this technique to save lots of on taxes, take care to keep away from triggering the superficial loss rule.
Learn the total definition of tax-loss harvesting within the MoneySense Glossary.
Capital positive factors and capital losses
In Canada, once you promote considerable property comparable to shares, bonds, valuable metals, actual property, or different property for greater than the acquisition worth of the funding plus any acquisition prices—a.ok.a. the adjusted price base (ACB)—that is referred to as a capital acquire.
The mathematics is fairly simple. If you happen to purchased a inventory for $100 and offered it for $200, the capital acquire is $100. The Canada Income Company (CRA) requires you to report the capital acquire as revenue in your tax return for the 12 months the asset was offered. And, 50% of its worth is taken into account taxable, primarily based on the speed of your revenue tax bracket.
On this instance, the taxable revenue is $50 ($100 x 50%), which is taxed at your marginal tax price. The CRA doesn’t tax capital positive factors inside registered accounts comparable to registered retirement financial savings plans (RRSPs) and tax-free financial savings accounts (TFSAs).
On the flip facet, once you promote an funding for lower than its ACB, that is thought of a capital loss. The CRA permits Canadian taxpayers to make use of capital losses to offset any capital positive factors.
In contrast to capital positive factors, capital losses will be reported in your tax return in any of the three years previous to the loss or to offset future capital positive factors. Capital losses don’t have any expiration date.
As an funding advisor in Canada, I observe my purchasers’ portfolios all year long to have a transparent view of their capital positive factors’ place and alternatives to reduce tax. That’s when tax-loss promoting comes into play.