As we head towards December, investors should begin thinking about the year ahead and planning for potential tax losses – selling their losing positions to offset capital gains.

Based on Canadian tax law, capital losses can offset capital gains in any fiscal year.

Losses must first be applied against capital gains in the current year; if any excess losses remain, they can be applied against capital gains made in the prior three years or be used to offset capital gains in future years. 

For example, if an investor had purchased 100 shares of XYZ Corp. at $40.00 and sold it in 2020 at $20.00 a share (on a net basis, including brokerage fees), the investor would now have a capital loss of $2,000. This loss can be used to reduce certain capital gains this year by $2,000. If there are no applicable capital gains this year, then this $2,000 capital loss can be carried forward to future years, or applied against capital gains incurred in 2018, 2019, and 2020 resulting in a tax credit or refund. 

But Remember...

Capital-loss selling cannot be applied to registered accounts, such as Registered Retirement Savings Plans (RRSP), Registered Educational Savings Plans (RESP), Registered Retirement Income Fund (RRIF), or Tax-Free Savings Accounts (TFSA). As well, capital losses will be foregone when you transfer a losing position from a non-registered account into a registered account.

If you are selling stock at a loss, you (and your spouse/common-law partner) must wait at least 30 days before repurchasing the same securities to avoid Canada Revenue Agency’s (CRA) “superficial loss” regulations. If you repurchase the shares within this 30-day window, CRA will determine that the trade was a “superficial loss”, and you will be denied the benefits of the transaction.

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

Waiting Until Next Year?

If you are selling securities at a profit in 2021, should you consider waiting until 2022 to make the sale? Waiting until the New Year to sell profitable positions will defer the payment of your taxes by a full year. Your taxes for 2021 won’t be due until you file your tax return in April 2022.

Caveat Emptor: Not wanting to pay tax in the current year may well be one of the worst reasons not to crystallize a capital gain.

Key Dates For 2021

*Wednesday, December 29th* – Mark this date on your calendar!

The last trading date for 2021 for Canadian and U.S publicly traded stocks will be Wednesday, December 29th to record the gain or loss in the 2021 taxation year.

Canadian stocks purchased or sold after December 29th are settled in 2022; any capital gains or losses on sale will apply to the 2022 tax year instead of 2021.

The Canadian stock exchanges, e.g., TSX, are closed on both Monday, December 27th and Tuesday, December 28th, 2021 in lieu of Christmas Day and Boxing Day respectively.

The U.S. stock exchanges, e.g., NASDAQ, are not closed for the Canadian dates, but instead for Friday, December 24th, 2021.

Tax-Loss Selling Is Concentrated

In general, tax-loss selling tends to be concentrated at the end of November and the first two weeks of December, with some investors going back into the market after this to take advantage of reduced equity values in the second half of December. Note, investors should be cautious about selling early to exploit market weakness later in the year, as that scenario may not always play out as expected.

The Art of Window Dressing

Money managers often clean up their portfolio holdings before the end of the tax year. Approximately 50% of U.S. mutual funds have a fiscal year end between October and December. They tend to sell stocks with large losses to avoid reporting them in their year-end report. This window dressing causes downward pressure on stocks that have already been seriously beat up and are trading near their 52-week lows towards the end of the year. However, on a positive note, once this downward pressure subsides, these stocks could experience a price reversal

What to Watch For (See link below for list of companies)

Year to date, the S&P/TSX Composite Index performance is heavily weighted towards the gainers, with 167 gainers, and 66 decliners. At this time last year, the index was spread more evenly, with 115 gainers, and 107 decliners.

The larger-cap S&P/TSX 60 Index is also tilted towards the gainers, with 51 gainers, and 9 decliners. On the contrary, at this time last year, the index was more balanced, with 34 gainers, and 26 decliners.

We believe that the worst and best performing equities are the ones to monitor.

Cash Management Group

604.643.0101 | Email us

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