If you or your spouse have realized capital gains in the last three years, consider selling an investment that has dropped in value to recover the taxes paid on those gains.
Stock market volatility may cause you to worry about your investments. You may want to take action and reorganize your portfolio, even if you’re in a loss position. Once the decision is made to crystallize losses, our capitalizing on capital losses strategy can be used to gain maximum tax benefit on portfolio losses. This strategy is based on carrying back any losses that exceed current year capital gains to a previous year with net capital gains.
The CRA requires capital losses to first be applied against capital gains realized in the current year. If there’s any remaining balance, the net capital losses can be used to either reduce taxable capital gains in any of the three preceding years or in any future year.
The best strategy is to carry the losses back to the earliest year in which you have capital gains before it falls out of the three-year window. For example, the earliest date allowed to carry back 2022 losses is 2019. The reason you want to carry back losses is that you can recoup taxes already paid and get that money working for you, rather than wait to realize a capital gain in the future to use your capital loss. Think of a capital loss as pre-paid taxes.
Transferring capital losses between spouses
If you don’t have capital gains this year or the previous three years but your spouse does, it’s possible to transfer capital losses to your spouse.
First, the investment is sold to crystallize the capital loss. Immediately afterwards, your spouse buys the exact same amount of the identical investment. Your spouse then sells the investment after waiting at least 31 days. The capital loss realized on your sale will be denied under the superficial loss rules and added to your spouse’s adjusted cost base instead, thereby transferring the capital loss.
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Fee-only Retirement Income, Investment, & Tax Planning
Willis J Langford BA, MA, CFP
Nancy Langford CRS
