What is year-end tax-loss selling, and should you care?
When stock markets go through a tough year, the opportunity to take advantage of tax-loss selling arises. So, what exactly is tax-loss selling? Let’s go through an example to find out.
Judy bought $400,000 of ABC Bank shares in her non-registered account. Today her ABC Bank shares are worth $350,000, and she is showing a $50,000 loss.
Judy plans on holding these shares for the next ten years. She isn’t overly concerned with the short-term drop in her investment. Today, we’re going to look at why it could make sense for Judy to sell this investment.
Nobody likes to see their investments fall in value. There is a silver lining, and it’s that you can take advantage of tax-loss selling.
Selling investments at a loss
If Judy were to sell her ABC Bank shares, she would generate a $50,000 loss. She can then take this loss and apply it toward investment gains over the last three years. Or against any future gains she will have.
Two years ago, Judy sold an investment in her non-registered account. The sale generated a $75,000 gain. When she completed her taxes for that year, she had to pay tax on the gain.
Given that this happened within the last three years, Judy can apply the $50,000 loss on her ABC bank shares against her $75,000 gain. This reduces her net gain to $25,000. As a result she would get back some of the taxes she paid at the time.
Sell and buy right back?
Since Judy plans on holding on to these shares for the next ten years, why doesn’t she sell her ABC Bank shares to trigger the loss and then buy them right back? The CRA has also thought of this, so there are rules to mitigate these tax loopholes.
Rules to know
If Judy sold her ABC Bank shares and then repurchased them within 30 days, her original loss would be nullified.
This applies even if the purchase is made in a different account. If Judy sold her ABC Bank shares in her non-registered account and then repurchased them in her RRSP within 30 days, the loss would not be valid.
It’s also important to note that this strategy only works in a non-registered account. If an investment is sold at a loss in a TFSA, RRSP, or any other registered account, the loss cannot be used to offset a gain.
If ABC Bank has a good month, Judy will miss out on the recovery since she has to wait 30 days before repurchasing the stock.
To get around this, Judy could purchase another investment positively correlated with ABC Bank. Traditionally, DEF Bank has had similar returns to ABC Bank. When ABC Bank’s share price rises, DEF tends to do the same as well, as they are in the same industry.
Judy could sell her ABC Bank shares and purchase DEF Bank to ensure she is in the market. She can participate in those returns if the banking industry has a good month. At the end of the 30 days, Judy can sell her DEF Bank shares and repurchase ABC Bank if she sees fit.
Careful when you have multiple advisors
Another downside of this strategy can occur if Judy is dealing with multiple investment advisors. One of her advisors might sell a position to trigger a loss, while her other advisor might buy the same investment within the 30-day window. If this occurs, the loss would not be applicable for tax purposes. Working with one advisor would likely be simpler and more efficient, so this issue doesn’t arise.
To summarize, if you have losses in your non-registered account, it may make sense to trigger them before the year’s end.