As your corporation approaches its tax year-end, you may be considering selling investments that have lost value, particularly those no longer aligned with the company’s investment strategy. This tactic—selling securities at a loss to offset capital gains—is a common year-end tax strategy known as tax-loss selling. Before proceeding, however, it’s crucial to factor in all costs, including transaction fees, as these can impact the overall benefit of this approach.
Key Considerations for Tax-Loss Selling
For Canadian tax purposes, the sale of a security is deemed to have occurred on its settlement date. If your corporation has a December 31 year-end, and assuming a one-day settlement period, transactions must be initiated by December 30, 2024, to ensure they settle within the same tax year, including both Canadian and U.S. securities.
Impact of the 2024 Federal Budget on Capital Gains
Canada’s 2024 federal budget proposes an increase in the capital gains inclusion rate from 50% to 66.67% for gains realized by corporations on or after June 25, 2024. As a result, corporations must distinguish between capital gains and losses incurred before and after this date:
- Period 1: Gains and losses realized before June 25, 2024
- Period 2: Gains and losses realized on or after June 25, 2024
Capital losses realized in Period 2 may offset capital gains from Period 1 but are subject to the lower inclusion rate (50%) for the earlier period. It’s important to track these periods carefully to maximize tax efficiency.
Beware of the Stop-Loss Rules
If your corporation plans to repurchase any securities sold at a loss, be aware of the stop-loss rules. These rules prevent the corporation from claiming a tax-deductible loss if it buys back the identical security within 30 days and holds it on the 30th day. If these rules apply, the loss is deferred until the security is sold to an unrelated third party.
Capital Dividend Account (CDA) Considerations
Before triggering a capital loss, review your corporation’s Capital Dividend Account (CDA). If your CDA balance is positive, it may be advantageous to pay out a capital dividend before realizing a capital loss. However, ensure the CDA balance is accurately determined, as paying out a capital dividend exceeding the CDA balance could result in additional tax liabilities. The calculation of the CDA in a transition year is complex, so consulting with a tax advisor is recommended.
Deferring Capital Gains with a Reserve
If your corporation has already sold or is planning to sell capital property in 2024, you may be eligible to defer a portion of the capital gain by claiming a capital gains reserve. This allows you to spread the capital gain over a maximum of five years, deferring the related tax liabilities.
Compensation Strategies
Consider paying lower-income family members a reasonable salary or bonus to leverage their lower marginal tax rate based on the duties they perform for the business. This may allow you to take advantage of their lower marginal tax rate, as well as create RRSP contribution room and CPP pensionable earnings.
Explore paying bonuses to employees to optimize the company's taxable income within the business limit. The business limit for most provinces is $500,000. Active business income up to the limit will be taxed at a lower rate of 12.2%. Active business income over $500,000 will be taxed at the higher rate of 26.5%.
Declare Bonuses Before Year-End
To reduce your corporation’s taxable income for the current year, consider declaring a bonus before the year-end. Ensure the bonus is paid within 180 days after the corporation’s year-end, which allows the business to claim a tax deduction for the current year, while you’ll report the bonus as personal income only in the year it’s received.
Repay Shareholder Loans
If your corporation has loaned money to you, it’s important to repay the loan before the end of the corporation's tax year. This will prevent the value of the loan from being treated as income on your personal tax return.
Donate Securities In-Kind
Donating securities in-kind from your corporation is an effective strategy, especially if the securities have appreciated significantly. By donating securities directly, the corporation can eliminate the capital gain accrued on those securities and receive a tax credit based on the fair market value of the donation. This not only reduces your corporation’s overall tax liability but also increases the balance of the CDA, potentially enabling tax-free distributions to shareholders.
Corporations can generally claim a charitable donation deduction up to 75% of net income. If the full donation cannot be claimed in one year, any unclaimed portion can be carried forward for up to five years.
Plan Ahead for Future Tax Benefits
Proactive tax planning is key to preserving and growing your corporation’s net worth. It’s essential to understand the potential implications of these strategies and how they can be best implemented to minimize tax burdens. Speak with a qualified tax advisor to ensure that the tax planning opportunities discussed are tailored to your corporation’s specific needs and goals.
By taking a strategic approach, your corporation can maximize its tax efficiency and set a strong foundation for future success.
Learn about Finucci Janitis Allen Wealth
RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ® / TM Trademark(s) of Royal Bank of Canada. Used under licence. © 2023 RBC Dominion Securities Inc. All rights reserved