When markets take a downturn, some investors can benefit from an often overlooked strategy called tax loss selling. If you own investments in a non-registered account that have dropped in value, this tactic might help you reduce your tax bill. Let us take a look at how it works.
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How Tax Loss Selling Works
Consider the case of Judy. She bought four hundred thousand dollars worth of ABC Bank shares in her non-registered account. After a tough year in the market, those shares are now worth three hundred fifty thousand dollars. Judy is sitting on a fifty thousand dollar unrealized loss.
Judy plans to hold these shares for the long term, but there is an opportunity to make the current loss work in her favor. By selling her ABC Bank shares now, Judy could lock in that fifty thousand dollar loss. She could then apply the loss against investment gains from the past three years or save it to offset future gains.
For example, two years ago Judy realized a seventy five thousand dollar gain when she sold another investment in her non-registered account. She paid tax on that gain. If she now triggers the fifty thousand dollar loss from her ABC Bank shares, she can reduce her past net gain to twenty five thousand dollars and reclaim some of the tax she already paid.
Beware of the 30-Day Rule
You might wonder why Judy does not simply sell her shares to trigger the loss and immediately buy them back. The Canada Revenue Agency has rules to prevent this. If you repurchase the same investment within 30 days, even in a different account such as an RRSP, the original loss is disallowed.
This is why timing matters. Judy must wait at least 31 days to buy back her ABC Bank shares if she wants the loss to count.
Managing Market Risk During the Waiting Period
Of course, while Judy is waiting 30 days, the share price could rebound. To help manage this risk, she could temporarily buy shares in another bank stock that tends to move in line with ABC Bank. For instance, if DEF Bank has historically followed a similar performance pattern, buying DEF Bank shares would help her stay invested in the sector during the waiting period.
Potential Pitfalls
There is another risk to consider. If Judy works with multiple advisors, one advisor might sell ABC Bank to trigger a loss while another advisor unknowingly repurchases it within the 30-day window. This would accidentally nullify the tax loss. Keeping coordination clear across all accounts and advisors is essential.
Final Thoughts
If you have losses in your non-registered account, it may be worth considering tax loss selling before year-end. A well-planned strategy can help you reduce your tax bill and improve your overall returns. As always, it is wise to consult a qualified advisor to make sure the timing and execution align with your broader financial plan.
To learn more about how we help Canadians plan smarter for retirement and manage taxes effectively, visit our website and book an appointment with us.
