As the end of the year approaches, you may want to review your investment portfolio to consider possible rebalancing opportunities. It may also make sense to consider engaging in a tax-loss selling strategy before the end of the year, to reduce your overall tax liability or to receive a refund of taxes paid in a previous year.
With a tax-loss selling strategy, investments that have declined in value are sold in order to generate a capital loss for tax purposes, which can be used to offset capital gains already generated during the year. Alternatively, an aggregate net capital loss in the current year can be carried back and applied against net capital gains realized in the three preceding years, or carried forward for use in a future year.
The amount of capital gains subject to tax each year is based on the calculation of net capital gains, which is the sum of all capital gains less all capital losses realized in the year. Therefore, to the extent that an investor realizes capital losses in the same taxation year that a significant capital gain is triggered, the tax liability on the capital gain can be reduced (or eliminated).
Therefore, as the end of the year approaches, it may be worthwhile to review your portfolio with your BMO financial professional to consider the sale of certain investments with unrealized losses, provided a sale makes sense from an investment perspective.
Considerations before implementing a tax-loss selling strategy
Before implementing a tax-loss selling strategy, consider the following:
1. Losses can be applied to current or previous year’s gains
Capital losses are first applied to offset capital gains in the current year,1 but any unapplied (aggregate) net capital losses can be carried back for up to three years, so it’s important to review your 2017 capital gains and losses realized to-date, and your tax returns from 2014, 2015 and 2016 to determine if you reported net capital gains in any of these years. If so, check with your tax advisor to understand the possible tax benefit of applying any net capital losses to offset these gains.
2. Foreign currencies
Remember that capital gains or losses on foreign securities denominated in another currency are calculated in Canadian dollars, even if the sales proceeds remain in the foreign currency. The foreign exchange rate at the time of purchase is used in the calculation of the tax cost base, and the foreign exchange rate at the time of sale is used to calculate the proceeds on the sale. Therefore, fluctuations in the foreign currency relative to the Canadian dollar over the period of ownership will also factor into the analysis.
On a related note, be aware that a capital gain or loss (in excess of $200) may be realized for tax purposes on U.S./foreign cash balances, to the extent that the funds were sold or disposed – e.g., converted into Canadian dollars, used to purchase another stock/security or used to pay expenses or make a purchase.
3. Confirm tax cost base of the security
Speak to your accountant or other tax advisor to confirm the actual tax cost base of your investments. The tax cost will often be different from the original purchase price as a result of corporate re-organizations, tax elections, distributions (such as return of capital), or the requirement to calculate a weighted-average cost for tax purposes of a security that is held across more than one non-registered account.
4. Be aware of the superficial loss rule
The superficial loss rule within the Canadian tax legislation may deny a capital loss realized on a sale or disposition of an investment. The rule generally applies if:
i. During the period that begins 30 days before the sale and ends 30 days after the sale, you – or any person or entity considered to be affiliated with you for tax purposes – acquired the same or identical security, and
ii. At the end of the period, you – or an affiliated person or entity – owned or had the right to acquire the same or identical security.
Corporate investors should be aware of rules similar to the superficial loss rule for individuals, that will deny and “suspend” the capital loss in the corporation. Corporate investors should also take note of another “stop-loss” provision that can deny a capital loss where a deductible (Canadian) dividend was received by the corporation on a share prior to the sale of the share at a loss, unless the corporate investor held the share for the preceding 365 days and did not own more than 5% of any share class in the dividend-paying company.
5. Pay attention to the settlement date
Since it is the settlement date of the trade which is relevant for tax purposes (i.e., it now generally takes two business days from the trade date for an equity trade to settle), ensure that there is sufficient time remaining after the trade date to allow the transaction to settle in 2017. The last day to make an equity trade that settles in 2017 is expected to be December 27, 2017.
Seek professional advice
Be sure to consult with your tax advisor prior to implementing a tax-loss selling strategy to ensure that it is appropriate for your situation and is implemented properly.
1 Individuals intending to claim their lifetime capital gains exemption in the year should be aware that a “tax-loss selling” strategy can impact this claim. Please consult with your tax advisor for assistance.
BMO Wealth Management provides this publication for informational purposes only and it is not and should not be construed as professional advice to any individual. The information contained in this publication is based on material believed to be reliable at the time of publication, but BMO Wealth Management cannot guarantee the information is accurate or complete. Individuals should contact their BMO representative for professional advice regarding their personal circumstances and/or financial position. The comments included in this publication are not intended to be a definitive analysis of tax applicability or trust and estates law. The comments are general in nature and professional advice regarding an individual’s particular tax position should be obtained in respect of any person’s specific circumstances.
BMO Wealth Management is a brand name that refers to Bank of Montreal and certain of its affiliates in providing wealth management products and services. Not all products and services are offered by all legal entities within BMO Wealth Management.
BMO Private Banking is part of BMO Wealth Management. Banking services are offered through Bank of Montreal. Investment management services are offered through BMO Private Investment Counsel Inc., an indirect subsidiary of Bank of Montreal. Estate, trust, planning and custodial services are offered through BMO Trust Company, a wholly owned subsidiary of Bank of Montreal.
BMO Nesbitt Burns Inc. provides comprehensive investment services and is a wholly owned subsidiary of Bank of Montreal. If you are already a client of BMO Nesbitt Burns Inc., please contact your Investment Advisor for more information.
® “BMO (M-bar Roundel symbol)” is a registered trade-mark of Bank of Montreal, used under licence. ® “Nesbitt Burns” is a registered trade-mark of BMO Nesbitt Burns Inc.
All rights are reserved. No part of this publication may be reproduced in any form, or referred to in any other publication, without the express written permission of BMO Wealth Management.