Capital Loss Planning

Explore recent updates on this topic.

It's that time of the end of the year, when investors typically review their portfolios for potential capital losses to apply against realized capital gains in order to reduce their income tax for the year. For a Canadian taxpayer to apply a capital loss against capital gains realized in the 2023 tax year, the trade must settle on or before December 31, 2023. US tax returns use the trade date as the inclusion date for the year-end cut-off, not the settlement date. US citizens should keep that in mind to avoid a mismatch of gains or losses between the Canadian and US tax return years.

For Canadian and U.S. markets, the last 2023 trade date is December 27, 2023 for settlement on December 29, 2023.

Consider these tax strategies for realizing capital losses:

• Sell the security and move to cash.
• Sell the security and replace it permanently with another suitable investment.
• Sell the security and temporarily replace it with a correlated ETF then repurchase the stock after 30 calendar days.
• Donate a loss security to a Canadian registered charity to realize the loss and receive a donation tax credit.
• Carry back net capital losses to offset net capital gains in the prior three years where the highest rate of income tax applied.
• Carry forward net capital losses where there is an expectation of high capital gains and high marginal tax rates in the future.
• Defer realizing the loss to a future year when there will be a large capital gain planned, such as the sale of a rental property.

Capital Loss Carry Backs and Carry Forwards

When capital losses exceed capital gains for the tax year, a net capital loss is the result. A taxpayer may carry back net capital losses for a particular tax year to reduce net capital gains in any of the prior three tax years.

The taxpayer may also carry forward the net capital loss indefinitely to reduce net capital gains realized in future tax years.

Illustrative example of loss carry backs and carry forwards:

Alternative Minimum Tax Proposals and Capital Loss Carry Forwards

The proposed changes to the alternative minimum tax (AMT) calculation will introduce complexity after 2023 because capital loss carry forwards will be applied at only 50% of the gross loss while the capital gain will be included at 100% for AMT purposes. Due to this unequal offset, individual taxpayers with taxable income greater than $173,000 should use caution when planning a capital loss realization to carry forward to future tax years to offset planned capital gains. The loss may be claimable for regular federal tax purposes, but AMT may reduce the benefit of claiming the loss. Starting in 2024, it may be more prudent to realize capital losses in the same year as an offsetting capital gain rather than carrying forward capital losses to future years.

Superficial Loss Rules

A taxpayer cannot simply sell and repurchase the same securities to realize a deductible capital loss. The tax rules will treat the transaction as a superficial loss to deny the loss claim if the taxpayer or their spouse acquires the same security within 30 days before or after the sale and they still own the security at the end of that period. This rule includes repurchases inside RRSP, RRIF, and TFSA accounts, as well as repurchases by a corporation controlled by the taxpayer or their spouse. The current holder of the repurchased security must add the denied loss to their adjusted cost basis (ACB). This rule also means that taxpayers should not contribute loss securities in-kind to their RRSP or TFSA because the loss is not claimable at time of contribution or eventual disposition inside the plan.

Taxpayers can use the superficial loss rules to transfer a capital loss to their spouse. For example, if X already has capital losses for the year or a loss carry forward balance, they can sell the asset on the market and co-ordinate with Y, their "non-loss/high capital gain" spouse to buy the security on the market within 30 days of X’s sale date. Y receives the higher cost basis for tax purposes because Y must add X’s denied loss to their own ACB. Y can then realize the loss when Y sells it on the market at least 30 days after X sold the stock.

Foreign Currency Translations

Remember to consider foreign exchange rates when estimating capital gains for the year. A large gain within a US dollar account could end up as a loss in Canadian dollars (or vice versa) when the purchase and sale values are translated at their respective spot rates.

Canadian Private Corporations

Shareholders of Canadian private corporations should speak to their corporate tax accountant before their corporation disposes securities to realize a capital loss. There could be a plan to pay out a capital dividend and any capital losses will create an unexpected reduction in the capital dividend account (CDA) balance. The CDA balance is measured at a point in time, not from fiscal year to fiscal year. Capital dividends paid out in excess of the capital dividend balance are subject to a 60% penalty.

Speak to your Raymond James financial/investment advisor to discuss your capital loss planning strategies.

This has been prepared by the Total Wealth Solutions Group of Raymond James Ltd. (RJL).  Statistics and factual data and other information are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities nor is it meant to replace legal, accounting, taxation or other professional advice. We are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters. The information is furnished on the basis and understanding that RJL is to be under no liability whatsoever in respect thereof. This is intended for distribution only in those jurisdictions where RJL and the author are registered. Securities-related products and services are offered through Raymond James Ltd., Member of the Canadian Investor Protection Fund. Insurance products and services are offered through Raymond James Financial Planning Ltd. (“RJFP”), a subsidiary of Raymond James Ltd., which is not a Member of the Canadian Investor Protection Fund. When providing life insurance products, Financial Advisors are acting as Insurance Representatives of RJFP. Raymond James Ltd.’s trust services are offered by Solus Trust Company (“STC”). STC is an affiliate of Raymond James Ltd. and provides trust services across Canada. STC is not a Member of the Canadian Investor Protection Fund. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.