Judy bought $400,000 of ABC Bank shares in her non-registered account. Today her ABC Bank shares are worth $375,000, and she is showing a $25,000 loss.
Judy plans on holding these shares for the next ten years, so she isn’t overly concerned with the short term drop in her investment. For this week’s year-end tax tip, we’re going to look at why it would make sense for Judy to sell this investment, even though she plans on holding it for a long time.
Check out part 1 and part 2 for other year-end tax tips
Nobody likes to see their investments fall in value, but if there’s one silver lining, it’s that you can take advantage of tax-loss selling.
If Judy were to sell her ABC Bank shares, she would generate a $25,000 loss. She can then take this loss and apply it towards any investment gains she’s had 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, which 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 $25,000 loss on her ABC bank shares against her $75,000 gain. This reduces her gain to $50,000, and she would get some of the taxes back that she paid at the time.
Since Judy plans on holding on to these shares for the next ten years, why doesn’t she just sell her ABC Bank shares to trigger the loss and then buy them right back? The CRA has thought of this as well, so there are rules to mitigate these types of tax loopholes.
Rules to know
If Judy sold her 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 that is 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 not out of the market. If the banking industry has a good month, she will be able to participate in those returns. At the end of the 30 days, Judy can sell her DEF Bank shares and repurchase ABC Bank if she sees fit.
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 be buying the same investment within the 30-day window. If this occurs, the loss would not be applicable for tax purposes. It would likely be simpler and more efficient to work with one advisor, so this issue doesn’t arise.