For Canadian buyers who’ve achieved vital taxable capital gains, now’s the time to implement a tax-loss promoting technique—the simplest approach to discover tax financial savings.
What’s tax-loss promoting in Canada?
Tax-loss promoting is an investing technique designed to offset taxable capital good points and scale back your tax invoice. It entails promoting investments to set off a capital loss and claiming them in opposition to capital good points.
Definition of tax-loss harvesting
Tax-loss harvesting, or tax-loss promoting, is a method for lowering tax in non-registered accounts. Traders promote money-losing investments, triggering capital losses they’ll use to offset capital good points incurred the identical 12 months. Tax losses will also 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, while you promote considerable property resembling shares, bonds, treasured metals, actual property, or different property for greater than the acquisition worth of the funding plus any acquisition prices—a.ok.a. the adjusted cost base (ACB)—that is known as a capital acquire.
The mathematics is fairly easy. Should you purchased a inventory for $100 and offered it for $200, the capital acquire is $100. The Canada Revenue Agency (CRA) requires you to report the capital acquire as revenue in your tax return for the 12 months the asset was offered. And, 50% of its worth is taken into account taxable, primarily based on the speed of your revenue tax bracket.
On this instance, the taxable revenue is $50 ($100 x 50%), which is taxed at your marginal tax charge. The CRA doesn’t tax capital good points inside registered accounts resembling registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs).
On the flip facet, while 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 good points.
In contrast to capital good points, capital losses might be reported in your tax return in any of the three years previous to the loss or to offset future capital good points. Capital losses haven’t any expiration date.
As an funding advisor in Canada, I monitor my purchasers’ portfolios all year long to have a transparent view of their capital good points’ place and alternatives to reduce tax. That’s when tax-loss promoting comes into play.