With the arrival of cooler weather, the end of 2022 is already in sight. This may be a time to consider tax-planning strategies before year-end. If you are thinking of making portfolio adjustments, there may be an opportunity to gain from your losses through tax-loss selling.
What is Tax-Loss Selling?
Generally, an investment held in a non-registered account that is sold for less than its original cost will result in a capital loss. For tax purposes, 50 percent of the capital loss can be used to offset any taxable capital gains realized during the year to reduce your current tax liability. If you do not have sufficient capital gains to offset the losses, the net capital loss can be carried back to any of the previous three taxation years to offset realized capital gains, or carried forward to use against future realized capital gains. Be aware of the “superficial loss” rules, which deny the capital loss if you or an affiliated entity (such as a spouse, RRSP, TFSA) acquires the same security either 30 days before/after the date of the loss transaction. In this case, you will not be allowed to use the capital loss in the current tax year to offset capital gains. Instead, the capital loss will be added to the adjusted cost base of the identical property.
Gifting to Adult Children
Gifting investments that have declined in value to an adult child can put subsequent capital gain/income in the hands of someone in a lower tax bracket, resulting in less tax for the family unit. This will also trigger a capital loss in your hands, which can help to offset realized capital gains. For estate planning, transferring assets to your children while alive can reduce the value of your estate and the eventual taxes or probate fees (where applicable) on your estate at death.
Year-End Tax Planning By Donating Securities
Year-end tax planning often involves charitable giving. Donating publicly-traded securities “in kind” that have appreciated in value will eliminate the capital gains triggered and allow for a donation tax credit for the fair market value of the securities. However, for securities that have declined in value, you may wish to simply sell the securities to claim the capital loss and donate cash which will entitle you to a donation tax credit. (Unlike appreciated securities, where the capital gain will only be eliminated if you donate shares “in kind,” you will still be able to claim the capital loss). Remember to make charitable donations in advance of the December 31, 2022 deadline to count towards your 2022 taxes. Please seek the support of tax planning professionals for your situation.