Opportunities to reduce your 2024 tax bill
*Any reference to a spouse in this article also includes a common-law partner.
Tax loss selling
If you’ve realized capital gains during the year, and you’re holding securities with unrealized losses, consider selling those securities to realize the losses. This strategy of selling securities at a loss to offset capital gains realized during the year is a year-end tax planning technique commonly known as “tax loss selling.” Review your portfolio to determine if any investments are in a loss position and no longer meet your investment objectives. Consider all costs, including transaction costs, before selling investments solely for the purpose of triggering the tax loss.
When disposing of a security, the sale will be deemed to have taken place on the settlement date for Canadian tax purposes. Assuming a one-day settlement period, transactions must be initiated by December 30, 2024, for both Canadian and U.S. securities in order to settle during 2024. Check with your RBC advisor for mutual fund settlement dates.
Canada’s 2024 federal budget proposed to increase the capital gains inclusion rate to 66.67% from 50% for gains realized on or after June 25, 2024. The new rate applies to net capital gains exceeding $250,000 per year for individuals. As such, for 2024, you’re required to separately identify capital gains and losses realized before June 25, 2024 (Period 1), and those realized on or after June 25, 2024 (Period 2). Gains and losses from the same period are first netted against each other. More specifically, any capital losses you realize in Period 2, prior to December 31, 2024, will first be offset against capital gains realized in Period 2. After the offset, if there are still excess capital losses, those net losses will be offset against capital gains realized in Period 1.
You’d ideally want to use the capital losses realized in Period 2 to reduce any capital gains realized in Period 2, to the extent the gains are over $250,000 and are subject to the 66.67% inclusion rate. Be careful with the amount of capital losses you realize in Period 2, as net losses may end up offsetting capital gains realized in Period 1; this may defeat what you were trying to accomplish by realizing significant capital gains that are subject to the 50% inclusion rate.
Superficial loss rules
If the investment still has strong fundamentals and meets your investment needs, you may be thinking of selling the investment to trigger the loss, then repurchasing the security. However, to ensure your capital loss can be claimed, you should be aware of the superficial loss rules. These rules may prevent you from claiming the capital loss.
A superficial loss may occur when a security is sold at a loss and both of the following occur:
- During the period that begins 30 days before and ends 30 days after the settlement date of the disposition, you or a person affiliated with you (i.e. your spouse, a company controlled by you and/or your spouse, or a trust in which you and/or your spouse are a majority interest beneficiary) acquires property that is identical to the property that was sold at a loss; and
- At the end of that period (i.e. on the 30th day after the settlement date of the disposition), you or a person affiliated with you owns or has a right to acquire the identical property.
You need to consider your holdings across all accounts when determining whether the superficial loss rules apply. For example, if you purchase mutual funds on a pre-authorized contribution plan, be sure to check all of your accounts to make sure you’re not buying the same mutual fund you’re selling (in a different account, perhaps) for tax loss purposes within the 61 days that may trigger a superficial loss.
Carrying forward and carrying back capital losses
A capital loss must first be applied against any capital gains (including capital gain distributions from mutual funds) realized in the current year. Any unused net capital losses (i.e. capital losses that were not able to be offset by current-year capital gains) can be carried back to be claimed against taxable capital gains realized in the three previous years (2021, 2022, 2023) or carried forward indefinitely to be claimed against taxable capital gains realized in a future year.
When you carry back an unused net capital loss to offset a previous year’s taxable capital gain, it will reduce your taxable income for that previous year. This reduction may result in a refund of previously paid taxes. However, your net income, which is used to calculate certain credits and benefits, such as old age security (OAS), will not change.
If the investment still has strong fundamentals and meets your investment needs, you may be thinking of selling the investment to trigger the loss, then repurchasing the security. However, to ensure your capital loss can be claimed, you should be aware of the superficial loss rules. These rules may prevent you from claiming the capital loss.
This is the last year in which you can carry back your losses to 2021 to offset them against your 2021 capital gains. However, it may now be more tax efficient to carry forward unused net capital losses to offset a capital gain that’s subject to the 66.67% inclusion rate rather than to carry back the loss to offset a capital gain that was subject to the 50% inclusion rate.
Capital gains deferral
As you approach the end of 2024, you may want to consider deferring the realization of your accrued capital gains until 2025 if you expect to be in a lower marginal tax bracket next year or if you’ve already realized $250,000 of capital gains in Period 2.
In addition, realizing capital gains at the end of this year means that any tax payable associated with the gains would have to be remitted to the Canada Revenue Agency (CRA) by April 30, 2025. Realizing capital gains in 2025 means you can defer paying taxes on those gains (unless you’re required to make tax instalments) until April 30, 2026.
As always, the investment merits of deferring the sale of a security to the following year must be considered first, before looking at the potential tax benefit.