Nervous clients can take tax loss

Although most advisors would tell their clients not to sell, even as their portfolios take a big hit, a lot of investors are still getting out of the market. Luckily for panicky clients, bailing out of tanking investments means they’ve just accumulated capital losses.

The benefit of a capital loss is that it can be used to offset capital gains, which is especially relevant now, as it’s likely some people pulled out of the market months ago before they started losing money, triggering a capital gain.

Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management, says now is the best time to realize capital losses, as people have until December 31 to offset capital gains in 2008, which means they’ll pay less tax on their investments this year.

If a client does not have capital gains this year, he or she can get money back from the government by using capital losses to offset gains that were triggered in the past three years. And if the investor has no gains at all? “They can carry the loss forward indefinitely,” says Golombek.

Capital losses can also be used to offset gains that come with a mutual fund’s year-end distribution. While Golombek says many companies might not be offering much in the way of a distribution this year, thanks to the market turmoil, it might still be worth pitting some of those losses against what investors do receive to help with the tax burden.

Tax-loss selling strategies are particularly useful for clients holding BCE stock, as they’re about to get hit with massive capital gains when the company goes private in December. “For many people, this will trigger a significant gain,” Golombek explains. “Therefore, realizing capital losses would be another way to offset the tax hit.”

“For people who have non-RRSPs and Bell shares, their advisors should be taking advantage of some form of tax loss,” adds Robert Abboud, president of Wealth Strategies, an Orleans, Ont.-based financial planning firm.

Clients who think they can trick the taxman by selling an underperforming stock, realizing the capital losses and then buying back the investment need to think again — Canadians can’t repurchase stock for 30 days after it’s sold. And if anything has been proven recently, it’s that anything can happen to a share price in a month.

Abboud, however, has employed a strategy that circumvents the 30-day waiting period and still lets clients realize their capital losses.

Most companies offer versions of their funds in a corporate class structure. Switching from the regular offering into the corporate class triggers capital losses but doesn’t institute the waiting period.

“They can sell the retail version of a fund today at four and buy the corporate class today at four,” says Abboud. “It’s simply a switch. A strategy for creating a capital loss while staying in the market.”

While using a capital loss to lessen the tax hit this year is one way to ease the pain that some clients might be feeling, Abboud and Golombek caution investors who think they should get out of the market just for tax purposes.

“You don’t want to make a decision that’s tax driven,” says Golombek. “If you believe you’ve got a good investment for the long term, it rarely makes sense to simply do something for tax reasons and ignore the investment approach.”

“This doesn’t mean get out of market,” adds Abboud, “but advisors should get creative.”

Filed by Bryan Borzykowski, Advisor.ca, bryan.borzykowski@advisor.rogers.com