Is it time to sell your winning stocks? Given recent stock
market highs, plenty of investors are thinking that now's the
time to sell and lock in those juicy gains. That may or may not be
a good idea from an investment standpoint. But from a tax
perspective, triggering capital gain can also trigger a tax bill
– remember, you have to include 50% of capital gains in
income, to be taxed at your top marginal rate. To help soften the
blow, here are some places to look for tax losses (some obvious,
others not so much) that could shelter or offset capital gains
Look for bad loans. These include things like
bad mortgage investments or junk bonds (or even a no-good advance
to your company or a bad loan to a business associate).
To obtain a deduction, the loan must generally have been
documented and have been interest-bearing. So if you made a loan to
a relative on an interest-free basis, the Canada Revenue Agency
(CRA) can argue that the loan was not taken out for income-earning
purposes. Therefore, no loss is available. Make sure you dot your
i's and cross your t's when it comes to setting up a
An exception arises if you are a shareholder of a Canadian
corporation and have advanced funds to it on a low- or no-interest
basis. In this case, and if certain conditions are met, the CRA
will give you at least a capital loss on the bad loan.
When is a loan bad? The feds say that claiming a bad debt loss
on a loan is basically an all-or-nothing proposition. The entire
loan must be uncollectible in order for it to be a bad-debt loss,
or if a portion of the debt has been "settled," the
remainder must be uncollectible.
Also, you must have exhausted all legal means of collecting the
debt, or the debtor must have become insolvent, with no means of
paying the debt.
Going, going, gone...out of business. Another
overlooked source of tax losses to shelter gains is in investments
you might have made in companies that have gone bankrupt or are now
worthless because of insolvency and cessation of business
activities. This may often include a company that has been delisted
from a stock exchange.
Note: If a bad investment is in a Canadian private company that
was devoted to active business, the loss could qualify as an
"Allowable Business Investment Loss" (ABIL). If so, this
type of loss can be deducted against any type of income, whereas a
normal capital loss can be deducted only against capital gains.
Beware, however, that if you claim an ABIL, it has become
standard procedure for the CRA to follow up with more questions to
ensure that the ABIL is being properly claimed.
Money-losing bonds. It sounds counterintuitive,
but you can in fact lose money on a bond investment. This could
happen if you invested in a bond at a premium price over its par
value (this would be the case if the coupon rate on the bond was
higher than the prevailing interest rates when you purchased the
bond). If so, and the investment is in a non-registered account,
there will probably be a capital loss if you hold the bond to
maturity or if you sell the bond after its price has fallen (bond
prices move inversely to interest rate movements, so if rates go
up, bond prices fall).
Next time: Hunting for more losses to shelter
Originally published by The Fund Library.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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