When investing, making money is the goal, but all is not lost when you have a loss. You may be able to turn that loss into a tax win with “tax-loss selling”. Chris Gandhu, High Net Worth Planner at TD Wealth, joins Kim Parlee to talk about this tax strategy.
Originally aired in November 2017.
- Well, we all know the goal of investing is to make money. So when you don't, it is disappointing, but maybe not all is lost. We are getting close to tax-loss selling season, so how do you make the best of a bad situation? Earlier, I spoke with Chris Gandhu. He's a High Net Worth Planner at TD Wealth on this very subject.
- Gave us a fairly straightforward strategy to save you some tax. And you've alluded to the mechanics in your introduction. If your taxpayer with capital gains, and they happen to hold securities that are underwater, well, they have a choice. They can sell the securities, realize the loss, use the loss to offset the capital gain, and, of course, thereby, save some tax money.
- And they can also go backwards, can't they? If they can't use it in that year, they can use it for prior years in terms of tax paid.
- Yeah, I mean, you know, it's never perfect, so your losses will never exactly equal your gains. If your losses happen to exceed your capital gains, well, that's OK. The extra losses aren't lost. You can carry them back for the previous three taxation years or carry it forward for a future tax year.
- Now, can you use tax loss selling for any capital loss you have? I think I remember this. You can't do this within registered accounts.
- Yeah, that's exactly right. So, you know, you can't have your cake and eat it too. So the losses that can be used to offset the capital gains must arise from a taxable account such as a non-registered creating account. Tax-deferred accounts like RSPs and TFSAs won't count.
- Now, I understand that this time of year, specifically, is pretty important if you're thinking about using some sort of tax loss selling strategy. Why is now important?
- Yeah, generally, what I find is that taxpayers now have a fairly good idea of what their taxable position is. They know how many crystallized capital gains, for example, they have for the year. So they are just better able to implement this strategy in a more precise fashion.
- And I guess the precise fashion being also the timing of this. Because we can get a bit into this, but, you know, this is something you need to start doing right now because this isn't like a last-minute transaction you can do.
- Yeah, I mean, although the motivation is to wait as late as possible, what your viewers need to be aware of is that you actually have to realize the loss in the same tax year as the capital gain. And the closer we get to the end of the year, it gets a little bit troublesome because there's a trading date, there's a settlement date, and your viewers probably want to talk to investment managers. But just make sure you not only trade the security, but the fact that security also settles in 2017, for you to be able to use the losses against 2017 gains.
- All right, so talk to somebody. This is, again, not a very last-minute thing. You want to be thinking about this. I want to talk about some strategies. And I want to give you an example, and you tell me how this might work. Let's say that I have a stock-- we'll call it stock A-- and it's realized a huge gain over the year.
I want to sell one of my losing stocks-- let's just call it stock B-- and I try to reduce those capital gains taxes. I think stock B, though, might have some potential later on, and I don't really want to dump it. So can I just sell a stock and then buy it back again?
- Yeah. Generally, no. The quick answer is no. The reason is that if you buy the identical stock back within 30 days, the superficial loss rules will kick in, and they'll essentially deem the loss to be nil for you, so that won't work. And, in fact, you have to be very careful because you can't do funny things like even buy the same security back in a different account or even have your spouse or a corporation owned by you buy, rebuy that security.
- So what do you do, then? I mean, what are some ways? If you like maybe the space, can you buy back, let's say, an ETF or even a fund that is similar to but not like that security?
- Yeah, I think that's a great alternative. I mean, the first obvious answer is, well, if you can, wait 30 days.
KIM PARLEE: Yeah.
- Then you can buy the identical stock back. If you can't wait-- if you can't wait the 30 days, then you're absolutely right. If you sold stock A, perhaps, buy stock A.1, which is similar to stock A but not quite the same thing or perhaps buy mutual fund or ETF that tracks a similar type of stock or the same industry.
- I like the stock A.1. First time I've had a guest say that. That's interesting. Let me ask you-- let me ask you about spouses 'cause you mentioned that. What if I have an investment or investments that I've got a huge gain in-- great problem to have. My spouse is a loss. Is there anything we can do to coordinate between spouses in terms of trading and trying to capitalize on that loss to make it useful for both of us?
- Yeah, you know, this is a scenario that occasionally does come up, and it'd be nice to be able to sort of match those two together. And you can do some planning. It's a little bit nuanced, so let me try to explain that as best as I can here.
So between spouses, generally, when you transfer capital property such as a share or security, the transfer happens on a rollover basis. By that, I mean that the transferring spouse does not realize a gain or a loss. And then the recipient spouse, when they have any income or loss from it, they actually don't pick it up. That loss or income is then attributed back to the original transferring spouse.
Well, we don't want that. We don't want the transferring spouse to have the loss. We want the loss to go to the recipient spouse. So what you have to do is, in fact, use the superficial loss rules to your advantage.
So what you may want to do is-- I'll just use an example-- if we have spouse A that bought a share for $100, the share is now worth $10. They'd want to sell the share to spouse B at fair market value. So this is key. Elect out of the rollover, transfer it at fair value.
And when you do that, the superficial loss rules will kick in. They'll deny the loss to you. So in our example, the $90 loss will not be triggered. But the $90 loss will then be added to the cost base of the share held by the recipient spouse. So the recipient spouse will now own a security that they paid $10 for but that has a cost base of $100.
And second planning point. The recipient spouse then needs to hang on to that security for 30 days. That's critical. After that, they could sell it on the open market. They will then have the loss which they can use to offset their gains.
- Fascinating stuff. That one I know can't be done at the last minute. You got to think a little bit about that one.
- That's exactly right. There is now 30 days plus your trade and settlement date. So you pretty much have to do that planning in November.
- And that was Chris Gandhu. He's a High Net Worth Planner at TD Wealth.