With the turbulent markets, many people are watching their investments fall below what they originally paid for them.
What can be done to help cushion the fall? Should you sell some of your investments?
These are important questions that focus on the concept of capital losses and their impact on our tax situation.
A capital loss occurs when property, such as shares in a company, are sold for an amount less than what they were bought for. Any individual, corporation or trust can claim a capital loss, which can be used to offset a capital gains.
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It can be carried back three years from the year that it was incurred and can be carried forward indefinitely.
Taxpayers who expect to incur a large capital gain in the current year or have incurred one in the last three years may want to realize a capital loss this year to recover some of the taxes paid on the capital gain. It is important to note that this tax recovery will not be immediate because you will have to wait until the Canada Revenue Agency assesses your tax return.
You may also want to switch to a new investment that would better suit your investment needs.
When taking a capital loss, keep in mind the transaction costs associated with buying or selling the investment, such as brokerage fees. You want to make sure that the benefit of selling the investment isn’t outweighed by the cost of doing the transaction.
Also, be aware of superficial loss rules. Generally, a superficial loss occurs when you sell capital property and then you or your spouse or a company owned by you buy that property back 30 days before or after the date of sale. If this occurs, the capital loss may be denied.
Another issue is to determine if the capital gain exemption is applicable. Generally, you would want to use your capital gain exemption before a capital loss because the capital gain exemption can only be used to offset the gain on certain property, such as qualified farm property, and a capital loss can be used against the gain on any capital property.
Dividend account
The impact on the farm corporation’s capital dividend account must also be assessed. A capital dividend account allows dividends to be paid out of a corporation tax free. Realizing a capital loss can reduce the amount out of this account.
Many complex situations can occur when a capital loss is realized. Seek professional advice if you think this could apply to you.
Colin Miller is a chartered accountant and senior manager in KPMG’s tax practice in Lethbridge. His opinions do not necessarily reflect the views of The Western Producer. He can be reached at 403-380–5707 or by e-mail at colinmiller@kpmg.ca.
