What to do with capital gains or losses

Why read this?

• › You lost money on an investment
• › You made money on an investment this year, or in the past three years

Why is it helpful?

• › When you sell an asset, you have to pay tax on half your gains. If another investment lost money, it can offset your capital gains and you’ll only pay tax on half of any remaining profit.
• › Harvesting commonly applies to securities, but losses from personal loans, private business investments or real estate investments could also qualify.

When to carry back

• Carry losses back to the year you had the highest income.
• If there are still losses to use, then carry them back to the year with the highest tax rate.
• If there are still losses left, carry them back to the oldest qualifying year (three years ago). For your 2014 taxes, this would be 2011.

Why carry forward

• You want to offset future gains.
• Capital losses can be carried forward indefinitely. Upon your death, any unclaimed amounts can be applied against capital gains or ordinary income, notes Steinberg.

What to do?

• Monitor your portfolio for gains and losses.
• Discuss whether to sell underperforming securities with your financial advisor. Analyze whether the stock will recover soon.

  No: go ahead and sell.

  Yes or not sure: hold on to it. “You don’t want your tax strategy to drive your investment strategy,” says Jason Safar, tax services partner at PWC.

• To qualify for 2014 taxes, you had until Dec. 24 to sell.
• To claim the loss, complete line 127 of Schedule 3 of your personal return.
• To apply past capital losses, enter that amount onto line 253 of the return.
• To apply losses from the current year to taxes from the past three years, fill out a T1A Request for Loss Carryback.
• CRA will automatically track carry-forward amounts based on line 127 of Schedule 3. The resulting carry-forward will be listed on your notice of assessment.

Rules

1.

Capital losses must be used against current capital gains before being carried back.

2.

Capital losses can be carried back three years, or forward indefinitely.

3.

Capital losses incurred in prior years must be used in chronological order, starting with the earliest.

4.

Applying a previous-year loss to a previous gain will reduce your taxable income for the prior year. Your net income, which is used to calculate credits and benefits, won’t change.

RISK: Superficial losses

› A superficial loss is when you incur a capital loss, and then you, or a taxpayer affiliated with you—a spouse, business partner, business or trust—buys back that asset, or one that’s the same, 30 days before or after the date of the asset sale.

› The similar asset is called an identical property. It’s “the same in all material respects, so that a prospective buyer would not have a preference for one as opposed to another,” says CRA.

› If you purchase an identical property, you must sell it within 30 days after the original sale’s settlement date, or you won’t be able to use it for tax-loss harvesting.

› You could trigger a partial superficial loss by buying back a smaller portion of shares than you initially sold off, and holding them after the 30-day period.

› You may try to transfer securities into a self-directed RRSP to trigger a loss, says Safar. This is considered a non-arm’s length transaction and is ineligible for harvesting.

RISK: Missing market gains

• The 30-day ban on buying back a security means you would miss out if its value rises.
• If you sold an ETF, you could buy a different one invested in similar securities. Be careful: CRA considers two funds that track the same index identical properties regardless of fees or portfolio balance. But, it’s possible to buy in a similar asset class that tracks a different index.
• If you thinks the security will have a low value for a few months before recovering, you could buy it back at a later date for a similar cost.