Tax-Loss Selling: Using Losses to Achieve Tax Savings
2 min readBrought to you by Sound Choices - AGF Education for Investors and Advisors
If you sell an investment in a non-registered account, you will trigger either a capital gain or loss. A capital gain occurs when you redeem your fund units or shares at a unit price that is higher than the adjusted cost base (ACB) – not the original investment price. If you sell the investment at a price lower than its ACB, the difference is called a capital loss.
A capital loss can be used to offset capital gains realized on the sale of other property (if not held in a registered plan). By selling an investment that has an unrealized loss (the act of selling the investment “realizes” that loss), you can lower (and possibly cancel out) any capital gains taxes owed. So, tax-loss selling refers to when you strategically sell an investment to trigger that capital loss.
Before we go any further, it’s important to note that the information in this article provides general information and is not tax or investment advice. You should consult with a tax advisor about your particular circumstances to determine if this is suitable for you.
Here are answers to some frequently asked questions:
How is the ACB calculated?
Determining your ACB involves more than simply knowing your original investment price. The ACB is the cost of your units or shares, plus any expenses you incurred to acquire them, such as commission and annual fees. Other factors such as additional purchases, partial redemptions, transfers, reinvested distributions and deemed distributions will also affect your ACB. Also, if the same fund is held in multiple non-registered accounts, you are required to calculate your ACB across all accounts.
So, to determine the ACB of your investment, you need to keep track of all transactions resulting in the purchase, sale, reinvestment of distributions or transfer of fund units or shares.
Here’s an example:
|
Year |
Transactions |
Cost |
# of Units |
ACB per Unit |
|
2014 |
Purchase (includes any applicable acquisition fee) |
$10,000.00 |
1,000.000 |
$10.00 |
|
Reinvested Distribution |
$300.00 |
29.940 |
10.02 |
|
|
|
$10,300.000 |
1,029.940 |
10.00 |
|
|
2016 |
Purchase |
12,000.00 |
1,142.857 |
10.50 |
|
Reinvested Distribution |
750.00 |
70.755 |
16.60 |
|
|
|
23,050.00 |
2,243.552 |
10.27 |
|
|
2022 |
Redemption ($5,000.00) sold at a price of $10.70 |
(4,799.07) |
(467.290) |
10.27 |
|
Reinvested distribution1 |
250.00 |
23.148 |
10.80 |
|
|
Return of capital of $1002 |
(100.00) |
|
|
|
|
ACB at December 31, 2022 |
$18,400.93 |
1,799.410 |
$10.23 |
How is a Capital Gain Calculated?
A capital gain is calculated as follows:
|
Redemption Amount |
- ACB |
- Redemption Fees |
= Capital Gain |
|
$10,000 |
-$4,500.00 |
- $500.00 |
= $5,000.00 |
What type of redemption transactions trigger the reporting of capital gains or losses?
|
Applies |
Does Not Apply |
|
|
What else should I be aware of?
Here are some of the factors to consider before taking advantage of tax-loss selling:
|
Factor |
Implications |
|
Current Year |
To offset gains realized in a particular calendar year, losses must also be realized that year. Further, any gains triggered in the current year must be offset first before applying the losses to previous or future years. The losses can be carried back up to three years and forward indefinitely. |
|
Mutual fund distributions |
Mutual fund distributions are allocated to the investor based on the number of units owned on the record date, the date established by an issuer of a security for the purpose of determining a dividend or distribution. So if you own the fund on the record date, you will be allocated the full amount of the distributions regardless of how long you held the fund. |
|
Portfolio rebalancing |
Selling investments within a portfolio for the purpose of realizing capital gains / losses can change the asset mix. Your financial advisor can help ensure the portfolio is rebalanced to the asset mix that's appropriate for your needs. They can also help keep track of how these transactions impact each investment's ACB. |
|
Superficial loss |
This Canada Revenue Agency rule states that you (or a person affiliated with you) cannot buy the same investment within 30 days of the sale and claim a capital loss. A person affiliated with you includes, among others, a spouse / common-law partner or corporation. |
As mentioned above, you should consult with your financial advisor to better understand how your portfolio could benefit from this strategy. Don’t have a financial advisor? Before you start your search, read about working with a financial advisor.
Commissions, trailing commissions, management fees and expenses all may be associated with investment fund investments. Please read the prospectus before investing. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated.
This material is for informational and educational purposes only. It is not a recommendation of any specific investment product, strategy, or decision, and is not intended to suggest taking or refraining from any course of action. It is not intended to address the needs, circumstances, and objectives of any specific investor. This information is not meant as tax or legal advice. Investors should consult a financial advisor and/or tax professional before making investment, financial and/or tax-related decisions.
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RO 3245856
November 27, 2023