Q. I am 30 years old and a young investor. I have learned from my parents to start investing for retirement early so that I know I will have enough money to retire comfortable. This year I have lost money in some of my investments both in my RRSPs and in my unregistered account. How can I use these losses to our advantage? – Arani S.
A. While tax planning is a year round process, year-end is often the time investors realize any capital losses so as to offset capital gains and thereby reduce their capital gains tax. As registered accounts are tax-sheltered vehicles, losses cannot be used to offset gains and capital gains need not be reported either. Harvesting losses in your taxable, unregistered account, however, is an effective tax planning strategy, and allows you to take advantage of market downturns that create losses to be used to offset other capital gains.
Consider realizing losses by selling the losing securities, especially if there will be a net loss that can be carried back to reduce taxable capital gains paid in the prior three years. Losses not carried back can also be carried forward indefinitely and thus can be used to offset future years’ capital gains. It’s important to know that a capital loss must first be applied against any capital gains (including capital gains distributions from mutual funds) of the current year. However, once these capital gains have been used, the balance of the loss can be either carried forward or back. If losses are carried back, there is a CRA form T1A “request for loss carryback” that is used to apply the loss and designate the year(s).
Beware of the superficial loss rule that requires you to wait at least 30 days before repurchasing the same property if you want to be able to claim the capital loss. Also, a loss on the disposition of property will be deemed superficial if during the period that begins 30 days before and ends 30 days after disposition, the tax payer or their spouse (or common-law partner) acquires the same property. A superficial loss is denied and cannot be claimed. Due to recent tax changes, this rule also applies to selling property held in an unregistered account and reacquiring the same property inside an RRSP or RRIF. Best to seek the advice of a tax professional to get appropriate guidance and prevent grief.
Bev Moir is a Senior Investment Executive and financial planner with The Moir Team at ScotiaMcLeod,Toronto. ScotiaMcLeod is a division of Scotia Capital Inc., a member of the Scotiabank Group. Member Canadian Investor Protection Fund (CIPF).
This article is for information purposes only. It is recommended that individuals consult with a financial or tax advisor before acting on any information contained in this article. The opinions stated are not necessarily those of Scotia Capital or The Bank of Nova Scotia
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