Tax-Loss Selling Strategy
By: Bobby B. Solhi, J.D. and Cornelia Yeung
What is Tax-Loss Selling?
Many investors consider tax saving strategies near the end of the calendar year. This is common in the financial community where tax-loss selling was discussed recently in an article published by The Globe and Mail.
This strategy can be fairly basic or complex depending on the circumstances. Put simply, an investor will trigger losses – for instance on publicly traded shares – to offset any gains they may have incurred during the year or previous three years on other investments.
Mrs. Smith owns shares in two different publicly traded companies: Samsung and Blackberry. She bought her shares in both companies at $100/share. Blackberry is now valued $10/share while Samsung is valued at $200/share.
She is aware that there may be tax consequences to selling her shares and wants to utilize a tax loss strategy. Mrs. Smith is also of the view that her Blackberry shares are undervalued for the time being and that resurgence in the company is imminent.
Sometime in December, Mrs. Smith decides to sell her shares in Blackberry to realize a loss which she would use to offset the tax liability from her sale of the Samsung shares. (Let us assume that she is not an active trader and the loss/gain is on capital account).
Mrs. Smith sells 100 shares of Blackberry at $10/share for $1,000 in proceeds and a capital loss of $9,000. A few days later she sells 100 Samsung shares at $200/share for proceeds of $20,000 and a capital gain of $10,000. The net effect of her sale is a capital gain of $1,000 and a taxable capital gain of $500.
On January 10th, 2014, Mrs. Smith re-buys 100 shares of Blackberry at $10/share hoping it will take off in the months ahead.
Not so fast – Superficial Loss Rules
There are rules in the Income Tax Act of Canada (“Act”) that are aimed directly at these types of loss arrangements called the stop loss rules. In the case of the example above, we would be looking specifically at the superficial loss rules. The “superficial loss” arises when a taxpayer or certain affiliated persons disposes of certain property and within 30 days before or after this disposition the taxpayer or affiliated person replaces it with the same or identical property (called “substituted property”).
Affiliated persons is defined in the Act and generally refers to individuals and their spouses or common-law partners, certain partnerships, corporations and trusts, including an RRSP.
When the superficial loss rules apply, the taxpayer is prevented from claiming the losses for tax purposes as a deducted. The loss is instead added to the adjusted cost base (ACB) of the substituted property.
Mrs. Smith’s superficial loss
Mrs. Smith would trigger a superficial loss since she repurchased shares in Blackberry within 30 days of selling them. She would be prevented from deducting the losses against capital gain in her current tax year.
The stop-loss rules are complex and they are a fundamental feature of Canadian income tax law. It is critical to have a tax practitioner review loss strategy arrangements before implementing to avoid unintended consequences.
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TaxChambers LLP is collaborating with Andersen Global® in Canada.