You want to maximize your earnings, but you also want to minimize your tax exposure. A great way to do that is through tax-loss harvesting. That’s when you sell poorly performing stock and use that capital loss to offset your capital gains, reducing your tax.
Once you’ve found the stock you want to sell, check these eight things before you proceed:
- The type of income. If you get share or option awards through your job, you might be earning employment income (and not capital gains). That income can’t be offset by capital losses.
- The lifetime capital gains exemption. If you have a large gain from selling a private company or a farm or fishing property, up to $813,600 of that gain qualifies for the lifetime capital gains exemption (in 2015).
- Whether losses are superficial. This happens when you sell a security to trigger a loss, but then you, your spouse, or a corporation or other entity controlled by either of you rebuys that same security 30 days before or 30 days after the security was sold. If it falls within that window and that other person continues to hold the security at the end of the period, the loss is deemed superficial and denied.
- Whether superficial loss rules may work in your favour. If your spouse has significant gains while you hold losing investments, consider selling your shares and having your spouse acquire the same shares within 30 days. The denied loss will be added to the cost base of your spouse’s holding, allowing for a potential future sale at a loss.
- Loss carry-forward balances. Check these balances against your notice of assessment, but you may need to consult your accountant.
- Whether the loss stems from a business investment. If you lose money on a private investment, determine if the loss qualifies as an allowable business investment loss (ABIL) that can be used against any source of income in the year claimed.
- Your marital status. If you’re going through a divorce or separation, you can trigger losses when transferring investments to your spouse.
- Any charitable intentions. Consider donating publicly listed securities with accrued gains to fulfill your pledges. The income for such gains is often nil.