I don’t have much use for falling leaves. My kids are long past the age of jumping into piles of the things, and I resent every second I spend raking and stuffing them (the leaves, not my kids) into paper bags to put at the curb.
But falling stock prices? They’re a lot more useful than falling leaves this time of year.
With stock markets slumping in 2022 amid inflation, rising interest rates and recession fears, many investors are sitting on paper losses. Fall is the perfect time to “harvest” these losses for tax purposes.
Here’s a guide to tax-loss harvesting – also known as tax-loss selling – and some tips for doing it without running afoul of the Canada Revenue Agency.
Why sell a stock at a loss?
Normally, people like to sell stocks for a profit. But if you sell a stock for a loss in a non-registered account, you can use that capital loss to offset any taxable capital gains you have. No capital gains this year? No problem. You can carry back your capital loss for up to three years, or forward indefinitely, to offset capital gains in other years and reduce your tax bill. Just remember that tax-loss selling only applies to non-registered accounts; it doesn’t work in registered accounts, which are not subject to capital gains tax.
Can I buy the stock back right away?
No. For the loss to count as a capital loss, you must wait at least 30 days before repurchasing the shares. If you jump the gun, the loss is considered a “superficial loss” and you can’t use it to offset capital gains. The 30-day restriction also applies to the period before you sell the shares. For example, if you own 100 shares of Shopify Inc. SHOP-T that you’re planning to sell for a tax loss, and you purchase an additional 100 shares less than 30 days before the sale so that you’ll maintain ownership of 100 shares after the sale, that’s also considered a superficial loss.
What if I repurchase the stock in my RRSP or TFSA?
Sorry, you can’t get around the 30-day restriction by repurchasing the shares immediately in a registered account. The same goes for any account controlled by your spouse, as that would also count as a superficial loss. The purpose of these rules is to prevent investors from selling for the sole purpose of claiming a tax loss while still maintaining ownership of the shares.
But what if I still like the stock?
If you’re worried that the stock price could rebound during the 30-day waiting period, you have a couple of options. You could simply hold on to your shares and forget about the tax loss. Or, you could sell the stock and immediately repurchase a similar, but not identical, security whose price has a strong correlation with the stock you just sold. For example, you could sell Bank of Nova Scotia BNS-T for a tax loss and immediately purchase Canadian Imperial Bank of Commerce CM-T or even a bank stock exchange-traded fund. That way, you’ll still benefit if bank stocks rally. You could even sell one ETF and buy another ETF, but make sure the two ETFs don’t track the same index or you could trigger the superficial loss rule.
So what happens if I sell shares for a loss and buy them back before 30 days have passed?
Even though you can’t claim the loss in the current year, you still get a consolation prize: You are permitted to add the absolute value of the loss to the adjusted cost base of the shares you own. Doing so will reduce your capital gain, or increase your capital loss, when you eventually sell the shares. So the loss still has value, but it gets pushed down the road a bit.
Can I transfer a losing stock to my TFSA or RRSP and claim the loss?
Nope. You would still have control of the shares in that case, so you could not claim a capital loss. But if you transfer a stock with an unrealized capital gain to your TFSA (or other registered account), you’ll still have to pay capital gains tax. Nobody said life is fair.
What’s the tax-loss selling deadline?
You must sell your shares on or before Dec. 28 to claim the loss for the current tax year. That’s because stock trades take two business days to settle. If you wait until Dec. 29 to sell, your trade won’t settle until Jan. 3 because of weekends and holidays, and you won’t be able to use the tax loss this year.
Bottom line: It’s fine to put off raking leaves, but don’t wait until the last minute to harvest your tax losses or you could regret it.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.