With the end of the year approaching, most investors are likely looking forward to the holiday season. The relatively more ‘unpleasant’ tax season seems far away and shouldn’t start until next spring. However, keen investors recognize that the end of the year provides opportunities to help minimize their upcoming taxes. Tax-loss selling, sometimes referred to as tax-loss harvesting, is a strategy in which investors aim to benefit from investments that are in a loss position. Those with investments in non-registered accounts currently trading below their original cost can sell those investments and use the realized losses to offset any capital gains incurred during the year. If you are looking to take advantage of this tax strategy, here are some things to consider.

Key Deadlines

For most Canadians, the deadline to file your annual personal income tax return is April 30. Given that this falls on a Saturday in 2022, the deadline for 2021 personal income tax returns is Monday, May 2, 2022. Capital losses can be carried back to the previous three tax years and/or carried forward indefinitely. Only the sale of securities that settled within the calendar year are eligible to offset capital gains realized in the same year. If you still have capital losses after netting your gains, you are eligible to carry back those remaining losses to any of the previous three tax years to recoup taxes previously paid.

The Superficial Loss Rule

While the tax-loss strategy itself sounds quite straightforward, there are some nuances to consider, such as the superficial loss rule. This rule prevents investors from deducting a capital loss if one purchases an identical security that was originally sold within 30 days of the settlement date. This superficial loss rule also applies if “affiliates” such as your spouse, corporation, and others make that repurchase on your behalf.

Other Considerations

While this tax strategy is simple, circumstances differ between investors, and so the following should be kept in mind:

A) Keep track of year-end deadlines to ensure that transactions for tax-loss selling are completed in time to be used in the calendar year. Typically, settlement dates are two business days after the initiation of a sale.

B) To reiterate, you can't purchase an identical security 30 days before or 30 days after your settlement date otherwise, you violate the superficial loss rule.

C) The common transactions below involving realized capital losses may result in the application of the superficial loss rule where the capital loss is denied for your tax loss harvest strategy.

• Making an in-kind transfer of a security from your non-registered account to your RRSP/RRIF/TFSA/RESP of which you are the subscriber. Although not considered a superficial loss, these losses would be permanently denied under another section of the Income Tax Act and the loss can never be claimed.
• Selling a security in your non-registered account and immediately repurchasing the identical security in your RRSP/RRIF/TFSA/RESP.
• Selling a security in your non-registered account and immediately repurchasing the identical security in a   managed non-registered account or vice versa.
• Selling a security in your non-registered account and repurchasing the security in a corporation controlled by you.
• Selling a security held by one of the corporations controlled by you and repurchasing the same security in a different corporation also controlled by you.

You should consult with your investment advisor to work on an action plan to effectively use the year-end tax-loss selling strategy and to avoid the superficial loss rule. The points above are not exhaustive. Speak to your advisor and accountant for a more comprehensive view of your year-end tax planning strategies.