TAX-LOSS SELLING
It may seem odd to talk about taxloss selling in a year in which many investors’ non-registered portfolios are generally up, but you may still be holding on to that “sure thing” penny-stock your great uncle tipped you off about a few years back that’s just about to rebound. If your patience is running out, now may be a good time to consider dumping that stock, doing some taxloss selling to offset some of the gains you may have realized when you sold off some winners in 2017.
Tax-loss selling involves selling investments with accrued losses, typically at year end, to offset capital gains realized elsewhere in your portfolio. Any net capital losses that cannot be used currently may either be carried back three years or carried forward indefinitely to offset net capital gains in other years.
In order for your loss to be immediately available for 2017 (or one of the prior three years), the settlement must take place in 2017. New for 2017, Canada has adopted a shorter settlement period for equity and long-term debt market trades, to coincide with a change to a “T+2” (trade date + two days) standard on U.S. markets.
This means that, rather than the previous three-business-day settlement period, effective Sept. 5, 2017, trades are now settled in two business days. To complete settlement by Dec. 31, the trade date must be no later than Dec. 27, 2017, which, for the first time in Canada, puts your tax loss deadline after the Christmas and Boxing Day statutory holidays.
Note that if you purchased securities in a foreign currency, the gain or loss may be larger or smaller than you think once you take the foreign exchange component into account. For example, Jake bought 1,000 shares of a U.S. company in November 2012 when the price was US$10/share and the U.S. dollar was at par with the Canadian dollar. Today, the price of the shares has fallen to US$9 and Jake decides he wants to do some tax loss harvesting, to use the US$1,000 (US$10 — US$9 = US$1 x 1,000) accrued capital loss against gains he realized earlier in 2017.
Well, before knowing if this strategy will work, he’ll need to convert the potential U.S. dollar proceeds back into Canadian dollars. At an exchange rate of $1 U.S. = $1.25 CDN, selling the U.S. shares for US$9,000 yields $11,250 CDN. So, what initially appeared to be an accrued capital loss of US$1,000 (US$10,000 – US$9,000) turns out to be a capital gain of $1,250 ($11,250 — $10,000) for Canadian tax purposes. If Jake had gone ahead and sold the U.S. stock, he would actually be doing the opposite of tax loss selling and accelerating his tax bill by crystallizing the accrued capital gain in 2017.