Capital Loss Planning

Courtesy of Invesco, Posted 23 Jun 2014

Market downturns can provide planning opportunities to take advantage of losses and offset other capital gains. There are some pitfalls to avoid as well as tax strategies you can use to decrease your losses. After all, financial planning is essential when the markets go down, as well as up.

Planning for net capital losses


A capital loss must first be applied against any capital gains (including capital gains distributions) of the current year. However, once these capital gains have been used, the balanced of the loss may either be carried back to offset capital gains in any of the three prior years or carried forward indefinitely to offset capital gains of future years.

If you have unrealized significant capital losses this year, there's temptation to try to realize gains later in the year to offset some of these losses immediately. However, if you have net capital gains in any of the three previous years, you can also consider applying the net capital losses realized this year against the net capital gains realized in any one or more of those years. This way, you can receive a partial or full refund of the capital gains taxes you previously paid. If you have net gains in more than one of those years, there is no requirement that you must apply the loss against the earliest year first. For example, if you realized a net capital loss in 2014, and net capital gains in 2013 and 2011, you may choose to offset the loss this year against the gains in 2013 first as opposed to 2011. You may want to do this if your personal tax rate was higher in 2013 than in 2011 and you would like to maximize the amount of refund you receive or reduce the amount you owe.

Beware the superficial loss rule

Canada's tax rules require you to wait at least 30 days before repurchasing the same property if you want to be able to claim the full amount of the capital loss. This is known as the superficial loss rule. In addition, this rule applies to your spouse/common-law partner, a company controlled by you and/or your partner, or a trust to which you or your partner is the majority interest beneficiary.

For more information, view Invesco's InfoSheet here.