Lower Your Tax Bill with Tax-Loss Selling

By Grant White, December 03, 2021

As we approach year-end, it’s very important to think carefully about your investment portfolio from a     tax-efficiency perspective. If you have mutual funds, ETFs, stocks or bonds in a non-registered account, that means looking into whether there’s an opportunity to benefit from a strategy known as tax-loss selling.

How it works

No matter how rigorous and thorough we are when making investment decisions, some of our ideas won’t turn out as planned. But there’s a silver lining: when you sell a non-registered investment at a loss, you can use that loss to help offset any capital gains tax you owe for the current year or future years. You can also apply the loss retroactively to capital gains realized in the previous three years.

Tax-loss selling may be right for you if:

• Holdings within your non-registered account have appreciated exceptionally well for the year and you’d like to reallocate some of your gains to other opportunities.
• You realized gains on non-registered investments to fund a major purchase this year or within the last three years.
• You have paper losses on investments that are unlikely to recover meaningfully or for a significant amount of time.

When tax-loss selling, it’s important to be mindful of the “superficial loss” rule, which says that once you crystalize a loss on a security, you can’t rebuy that security within 30 days if you want to retain the ability to use the loss to offset capital gains tax. The rule also specifies that if you bought the security within the 30 days prior to the sell date, you cannot use the loss to cut your capital gains tax.

The superficial loss rule also applies to what the Canada Revenue Agency refers to as “affiliated persons,” which include your spouse or common-law partner, or a corporation that you or your spouse or common-law partner controls. This means, for example, that if you sell a stock at a loss to lower your capital gains tax and your spouse buys the same stock a week later, you’re no longer able to use the loss to reduce the tax you owe.

Let’s look at a simple example to illustrate the benefits of tax-loss selling.

Case study

Lynn invested $10,000 in each of TD Bank and Peloton at the start of the year, both within her non-registered account. Year to date (as of November 23, 2021), TD has shot up 33% to $13,300, while Peloton went the other way, dropping 71.7%.

Lynn still believes in the future of Peloton but thinks it’s time to take some profits on TD, so she sells half of her position. This triggers a capital gain of $1,650, 50% of which, or $825, is subject to tax at Lynn’s marginal rate. Since she’s in the top tax bracket, that works out to a $412.50 tax bill.

The alternative is for Lynn to harvest the loss on her Peloton shares to eliminate the tax liability on her TD gains and then rebuy Peloton after the 30-day superficial loss period. To eliminate her taxable gain, she sells just over 23% of her Peloton shares ($7,170 × 23% = $1,649.10). The capital loss of $1649.10 is then used against the gain from her TD shares and leaves her with 77% of her total shares.

The right advice

The idea behind tax-loss selling may seem straightforward, but for most investors with a well-diversified portfolio, deciding when to use this strategy – and with which holdings – typically requires professional-level judgment.

For example, you may have multiple holdings that stand out as candidates for profit-taking, but in the absence of in-depth analysis it may not be clear which ones still have meaningful upside potential and which ones are likely running out of gas and therefore worth selling off.

Thinking through considerations like this and crafting a strategy that optimizes both your portfolio’s performance potential and your tax situation is best left to an experienced advisor with intimate knowledge of your investments as well as your short- and long-term goals.

Grant White, CIM®, CFP® is a Portfolio Manager & Investment Advisor with Endeavour Wealth Management | iA Private Wealth in Winnipeg, Manitoba. He can be reached at (204) 515-3440 or grant.white@endeavourwealth.ca

This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.