How to tax-loss harvest

Why read this?

When your client sells an asset, she’ll have to pay tax on half her gains. If another investment lost money, it can offset her capital gains and she’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 your client 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 client’s 2013 taxes, this would be 2010.

Why carry forward

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

Monitor your client’s portfolio for gains and losses.
Discuss whether to sell underperforming securities. Does your analysis shows 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 2013 taxes, your client has until Dec. 24 to sell.
To claim the loss, complete line 127 of Schedule 3 of your client’s 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 client’s notice of assessment.

Capital losses must be used against current capital gains before being carried back.
Capital losses can be carried back three years, or forward indefinitely.
Capital losses incurred in prior years must be used in chronological order, starting with the earliest.
Applying a 2013 loss to a previous gain will reduce your clients’ taxable income for the prior year. Your client’s net income, which is used to calculate credits and benefits, won’t change.

Warning!

A superficial loss is when your client incurs a capital loss, and then she, or a taxpayer affiliated with her—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 your client purchases an identical property, she must sell it within 30 days after the original sale’s settlement date, or she won’t be able to use it for tax-loss harvesting.
Your client could trigger a partial superficial loss by buying back a smaller portion of shares than she initially sold off, and holding them after the 30-day period.
Clients 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.

Example of a superficial loss

The 30-day ban on buying back a security means your client would miss out if its value rises.
If she sold an ETF, she 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 your client thinks the security will have a low value for a few months before recovering, she could buy it back at a later date for a similar cost.