Is There a Silver Lining in Investment Losses?

Tax-loss selling is the act of selling a security at a loss (capital loss) and using the loss to offset realized gains (capital gains) incurred from selling other securities in a non-registered account. These current capital losses can not only be used to offset capital gains in the current tax year but can also be carried back three preceding years or forward indefinitely.

By applying realized losses from the sale to the current or prior year's capital gains in a non-registered account, investors can reduce their tax bill – which can mean more money in their pockets. While no one wants to realize losses in their portfolios, it is a realty that most investors face from time to time. So why not make the best of the negative situation and possibly save some tax in the meantime.

There are however a few factors investors need to keep in mind when considering using a tax-loss selling strategy:

Superficial loss rule - According to the superficial loss rule of the Canada Revenue Agency (CRA), investors claiming a capital loss on the sale of an investment cannot buy the same or identical investment within 30-calendar days of the sale.

For example, if investors dispose of capital property for a loss and repurchase the same property within a 30-day period after its sale, the superficial loss rule will come into effect. This means a capital loss cannot be deducted from the capital gains for the year. The superficial loss 30-day rule is specifically designed to prevent investors from playing the system to lower their income tax payments.

Eligibility - Tax loss selling only applies to investments sold in non-registered accounts. Capital gains in registered accounts, such as a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA), are exempt from taxes. Using capital losses within registered accounts to offset gains in other accounts is not allowed.

For additional information about tax-loss selling or for specific financial or tax needs, please consult a qualified tax advisor.

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