Tax-Loss Selling 2022: More Important Than Ever

2022 is going to be a year most stock market investors will want to put in the rearview mirror. As we head into the new year, there can be a consolation for any losses that investors have endured this year. That consolation is called tax-loss selling.

How Tax-Loss Selling Works

Tax-loss selling allows investors to exit a position in a security and buy another with similar exposure. By doing this, investors are able to “harvest” capital losses while maintaining exposure to relevant key long-term sectors.

Tax-loss selling permits these losses from investments to be applied against taxes on capital gains as far back as three years, or into the future at any time. Because half of capital gains are taxed in a non-registered trading account, half of capital losses can eliminate those taxes on a dollar-for-dollar basis.

Calculating Your Capital Loss

If you had $100,000 in capital gains in 2021 and claimed $50,000 as income (assume a 50% tax rate), then $100,000 in capital losses in 2022 will allow you to write back your losses for up to three years in the past.*

When you have paid tax on capital gains in the previous three years, such as the $50,000 used in the example, the $100,000 in capital losses can be used against your capital gains in those years, (you would need to refile) or on capital gains in the future. In the case above, you would be able to offset 2021’s capital gains tax.

Calculating a capital loss can be tricky. The Canada Revenue Agency (CRA) provides further details on how to calculate a capital loss, as well as any conversations from the sale of a security in a foreign currency.

*Please note that the 50% capital gains tax is used as an example. Please consult an accountant as this example does not account for your own personal circumstances.

Superficial Loss Rule

As you may already know, the CRA is very particular about the rules they set for Canadians, especially when it comes to tax-loss selling. If you think a stock that has been poor may rebound in the coming months, you would likely be tempted to sell, realize the capital loss, then repurchase the shares as the stock price makes a recovery. This all sounds logical and feasible, except for the “superficial loss” rule.

The superficial loss rule maintains that when you are selling a stock at a loss you must wait at least 30 days before repurchasing the same securities, which you can then do on the 31st day. Furthermore, “affiliates” cannot make the purchase on your behalf. As per the CRA, “if you have a superficial loss, you cannot deduct it when you calculate your income for the year.”

Affiliates, as defined by the CRA constitute the following:

• You and your spouse or common-law partner

• You and a corporation that is controlled by you or your spouse or common-law partner

• A partnership and a majority-interest partner of the partnership

• After March 22, 2004, a trust and its majority interest beneficiary (generally, a beneficiary who enjoys a majority of the trust income or capital) or one who is affiliated with such a beneficiary

Understanding the “superficial loss” rule. (Source: Koinly.oi).

But Wait!

Tax-loss selling cannot be applied to the following registered accounts:

• Registered Retirement Savings Plans (RRSP)

• Registered Educational Savings Plans (RESP)

• Registered Retirement Income Fund (RRIF)

• Tax-Free Savings Accounts (TFSA)

Tax-loss selling or tax on capital gains does not apply to investments in registered accounts. (Source: Shutterstock).

Nor, can tax-loss selling be attributed to a transfer from a non-registered to a registered account.

You can however accelerate the tax savings from tax-loss selling by dumping the investment with the accrued loss from a non-registered account over to a registered account, assuming you have the contribution room, with the cash proceeds from the sale. You could even wait 30 days to avoid the superficial loss rule if you believe the security has long-term potential.

Capital gains from a non-registered account are taxed at 50%, while the tax on capital gains in a TFSA is zero. Capital gains from an RRSP become taxable when withdrawn in your retirement.

Keep Exchange Rates in Mind

The U.S. dollar is up nearly six per cent against the Canadian dollar in 2022. If you have purchased securities in U.S. dollars, the loss in Canadian dollars may be smaller than you might have expected.

Timing of Tax-Loss Selling

It is most common that tax-loss selling occurs at the end of November and the first two weeks of December. Some investors enter the market in the latter half of December to take advantage of reduced equity values.

However, investors should be cautious about this approach as it may not always work in one’s favour.

Important Dates to Know

In order for your loss to be applicable for 2022 (or one of the three previous years), the settlement must take place in 2022. The last trading date for 2022 for Canadian and U.S. publicly traded stocks will be Wednesday, December 28, 2022. This date is important to keep in mind.

Stock exchanges are not open every day of the year, they do in fact sometimes take holidays. The following are times when Canadian and U.S. stock exchanges are closed.

Canadian Stock Exchanges (E.g. TSX):

• Monday, December 26, 2022 - in lieu of Christmas Day

• Tuesday, December 27, 2022 - in lieu of Boxing Day

• Monday, January 2, 2023 - in lieu of New Year’s Day

U.S. Stock Exchanges (E.g. NYSE and Nasdaq):

• Monday, December 26, 2022 - Christmas holiday observed

• Monday, January 2, 2023 - New Year’s holiday observed

An empty floor at the New York Stock Exchange (Source: Kearney Ferguson / NYSE).

Given the complexity of tax laws, consult your Investment Advisor and tax professional before considering any tax-loss-related strategies.

As always, if you have any questions about tax-loss selling, you can call us at 604-643-0101 or email cashgroup@cgf.com.