It is not quite year-end, but you still might want to start your preparations for your annual year-end tax planning activities.
Speeding up the festivities this year was a terrible summer on the stock markets, leaving several adventurous sectors down significantly. This may be your opportunity to take advantage of capital losses in order to reduce your income taxes.
Although the market has rebounded fairly steeply in the first two weeks of October, you will still have some potential opportunities to crystallize losses, if you invested during 2011 in areas like emerging markets, energy or resource stocks, and even some European mutual funds.
Crystallizing a loss means selling a particular capital asset at less than its adjusted cost base, so the loss can be realized for income tax purposes.
Capital losses can only be used to offset capital gains, and not applied to other income. However, realized capital losses can be carried back and used against taxable capital gains in the previous three years. That can be very useful, if you paid tax on capital gains in any of the last three calendar years.
There’s nothing like getting back taxes you already paid and thought were gone forever. In order to do that, you would have to finish up 2011 with net capital losses on the investments, real estate or other capital property that you sold during the year. That simply means that the total of your realized capital losses must exceed the total of your realized capital gains in the year.
Once you’re in that situation, you can file an adjustment to one of those past tax returns to reduce capital gains claimed in those years. When you file your 2011 tax return, you complete CRA form T1A – Request for Loss Carryback, to apply your 2011 loss against gains reported in any (or all, if they are large enough) of 2008, 2009 or 2010.
If you have no net capital gains on which you paid tax in the last three years (or the amount is so small as to not make the claim worthwhile), then your current year net capital losses will carry forward indefinitely into the future, to be applied against realized capital gains into the future.
And, yes Virginia, there will be capital gains again in the future.
Separate from this, you may have missed applying net losses in the past. If net capital losses are shown on one of your Notices of Assessment and you had gains on a subsequent year’s return, file a T1-Adjust for the year in which the gains were reported and request that the previous losses be applied against those gains.
For example, if you have losses that incurred in 2008, for some reason, they were not applied to your 2009 gains, you can file an adjustment to request this.
But, wait a minute, Dave, you always said, “Don’t sell low.” What gives?
Good point. I don’t mean to sell at a loss and leave the investment arena. Usually the best thing to do when selling for tax reasons is to either buy back a similar, under-priced security that you expect to perform and recover in similar fashion as the one you sold.
Or, if you really like the investment that you sold, you can buy it back on the 31st day after you sell, and still apply the loss for tax purposes. (Buying back sooner disqualifies it as a “superficial loss”.)
None of these suggestions should override good investment selection and advice, proper asset allocation or good common sense.
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This information is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.