The stock market has gone into a tailspin, taking your investment portfolio with it. If that makes you unhappy, you are not alone. Your investment partners aren’t pleased, either.
Investment partners – who would that be? The federal and provincial governments, of course. After all, they grab a portion of every capital gain you realize on the sale of your shares and mutual funds.
Calling governments your partners may be overstating the case because they assume none of the risk while taking a piece of your realized gains. In the three years ending Dec. 31, 2007, it is estimated that Ottawa took in more than $14 billion in capital gains revenue.
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This year might be different because tax revenue from capital gains is expected to drop by almost $3 billion. One of the strong contributing factors to this reduction is an investment strategy called tax-loss selling.
If you have paid capital gains tax in the last three years, you can offset those amounts by selling the big losers in your portfolio this year. That is because you are allowed to carry your capital losses back three years and ahead indefinitely if you have no net capital gains in the current year. If your losses are big enough, you can get back some of the capital gains taxes you paid in 2005, 2006 and 2007.
There are factors to keep in mind when using this strategy.
Timing is one of them. You have to complete the selling transaction before the end of Dec. 31 of this year. The transaction isn’t completed until the settlement date, which usually occurs three days after you authorized your broker to make the sale.
Because the last few days of the year are busy ones for the brokerage community, you definitely don’t want to wait until the last minute to make this call. Placing your sell order by Dec. 24 is usually the safest course of action.
Timing also plays a role in how your capital losses are distributed. Under the tax rules, the loss must first be applied to any gains in 2008. Only if there are losses in excess of your gains in 2008 can they be applied to gains in the three previous years and carried forward to future years.
Another thing to remember is that if you buy or replace the same security you sold for the loss within 30 days before or after the sale, the Canada Revenue Agency deems the sale a superficial loss. Triggering a superficial loss means that the capital loss is denied and is added to the cost base of the investment.
Superficial loss rules also apply if your spouse or common-law partner or a non-arms-length entity such as a controlled company buys the identical security within the 30-day period.
There are other factors to also keep in mind so it is important to receive qualified financial advice before proceeding with this strategy.
Larry Roche is a tax analyst with farm taxation and planning specialists Farm Business Consultants Inc. He can be contacted at fbc@fbc.ca or call 800-860-7011.
