Towards year-end, you'll hear about "tax-loss
selling" if you're an investor. This refers to the
strategy of triggering losses before December 31 in order to offset
capital gains you may be facing for 2014. Of course, it's never
quite as cut-and-dried as it appears. In fact, there's a bit of
an art to it.
So the real question is: "How do you trigger a loss?"
One easy way is to look at the stocks or other investments in your
portfolio to see which are in a loss position (i.e., where the
current market value is less than the cost to you). By selling such
investments in a loss position, you can trigger a loss.
Why trigger a loss?
Yes, this means you aren't making any money off these sales.
However, it also means the loss that results can be used to offset
the gains, which could cut your tax bill.
Sounds easy doesn't it? But before you place your sell
order, here are some other things to watch for:
Do you need a tax loss? If you don't have any capital gains
as far back as 2011, there's no need to run out and sell a
loser just for its tax loss. (Capital losses can be carried back
only three years.) That's because capital gains can be claimed
only against capital losses. For most investors, the result will be
a capital loss.
Keep in mind that a capital loss cannot shelter income from your
job, a business or even an employee stock option benefit. So if you
have no capital gains, then there's no point in tax loss
A possible exception applies to losing investments in Canadian
private corporations devoted to active-business endeavours –
this could include over-the-counter traded stocks.
Do you have a tax loss? You probably are thinking it's
likely you are sitting on at least a couple of losses. However,
don't assume this is the case.
Whether you actually have a tax loss to begin with depends on
the tax cost of your investment - or as we tax drones call it, your
"adjusted cost base." One important thing to bear in mind
is that you must calculate your tax cost on a weighted average
basis for all identical investments.
Calculating your tax cost on a weighted-average basis
Let's say that you bought 2,000 shares of Xco at $20 per
share and another block of 1,000 at $40. Supposed, too, that you
decided to take your lumps on the second purchase and you sold the
block of 1,000 at $30. Your loss would be $10 a share, right?
You have to calculate your cost on a weighted average basis.
Since most of your shares were bought when the stock was below its
selling price, the weighted average cost per share would be $36.67.
Here's the math: (2,000 x $20 + 1,000 x 40)/3,000. Crunch these
numbers and you get $80,000/3,000, which works out to $3.33. So
that apparent $10 loss is in fact a $3.33 gain per share.
You must use this approach even if you used a different broker
for each purchase. Happily, though, initial purchases by other
family members will not figure in the weighted-average calculation.
For this reason, it may make sense to have other family members
make the initial purchases, in order to "isolate" cost
base in each person. If in our example your spouse had purchased
the second block at $40 and later sold it, your spouse's
adjusted cost base would have been based on the $40 amount.
Next time: Advanced tax-loss selling strategies, including
mutual fund sales.
The British Columbia Court of Appeal has recently considered whether the doctrine of unconscionability can be invoked to set aside a contractual clause providing for the payment by one party to the other...
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