For Canadian traders who’ve achieved vital taxable capital beneficial properties, now’s the time to implement a tax-loss promoting technique—the simplest technique to discover tax financial savings.
What’s tax-loss promoting in Canada?
Tax-loss promoting is an investing technique designed to offset taxable capital beneficial properties and scale back your tax invoice. It entails promoting investments to set off a capital loss and claiming them in opposition to capital beneficial properties.
Definition of tax-loss harvesting
Tax-loss harvesting, or tax-loss promoting, is a technique for lowering tax in non-registered accounts. Buyers promote money-losing investments, triggering capital losses they’ll use to offset capital beneficial properties incurred the identical 12 months. Tax losses can 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 complete definition of tax-loss harvesting within the MoneySense Glossary.
In Canada, once you promote considerable belongings akin to shares, bonds, valuable metals, actual property, or different property for greater than the acquisition value of the funding plus any acquisition prices—a.okay.a. the adjusted value base (ACB)—that is referred to as a capital achieve.
The mathematics is fairly simple. In case you purchased a inventory for $100 and offered it for $200, the capital achieve is $100. The Canada Income Company (CRA) requires you to report the capital achieve as earnings in your tax return for the 12 months the asset was offered. And, 50% of its worth is taken into account taxable, based mostly on the speed of your earnings tax bracket.
On this instance, the taxable earnings is $50 ($100 x 50%), which is taxed at your marginal tax price. The CRA doesn’t tax capital beneficial properties inside registered accounts akin 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 beneficial properties.
Not like capital beneficial properties, capital losses could be reported in your tax return in any of the three years previous to the loss or to offset future capital beneficial properties. Capital losses haven’t any expiration date.
As an funding advisor in Canada, I observe my shoppers’ portfolios all year long to have a transparent view of their capital beneficial properties’ place and alternatives to reduce tax. That’s when tax-loss promoting comes into play.