Managing your investments at year end

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Tips and tricks for Canadian tax filers at every stage of life from UFile's tax expert Gerry Vittoratos

Managing your investments at year end

by UFile Team Équipe ImpôtExpert | Dec 18, 2019   Comments:

UFile Blog- Managing your investments at year end

It’s the holiday season! A time to gather with family and friends and reflect on the year gone by. Tax season seems far away at this point, but it’s a lot closer than you might think. Hold on there, taxman, isn’t my filing deadline on April 30th of the FOLLOWING year? Yes, it is, but with a little investment planning (stocks/mutual funds/ETFs NOT in your RRSP/TFSA) over the holidays, you can come out a winner during tax season. How? Let’s find out.

Hold on to your winners a little longer

You saved your money diligently and made smart investments. Congratulations! You accumulated some gains and would now like to cash in some of these investments for that dream vacation, for example. What better gift could you ask for during the holidays?

But what if you could compound that gift even more? Wait until January to sell those investments. Why? Because you can defer the tax payable on those gains until the following year. Remember that on your tax return, you must report the income received for the calendar year and pay the applicable tax by April 30th of the following year. By selling your winning investments in December you will have to pay the tax on those gains within 4 months. If you wait until January, you can defer the tax owed for another 16 months. Now that’s win-win!

Hurry up and sell your losers

Now for the other side of the coin: your losers. You might have some investments that are currently underperforming but which you still want to keep long-term. That doesn’t mean you can’t perform a tried and true income tax strategy in order to optimize your tax return: tax-loss selling. For example, if you sold some winning investments during the tax year, you now have a taxable capital gain to include in your income. By selling your losers now, you can use the losses to reduce your taxable gains. This will reduce your taxable income, which means less tax to pay. If you weren't ready to sell your losers just yet, remember that you can always buy them back 30 days after the sale. This 30-day delay is important to avoid the “superficial loss” designation. You can't claim a capital loss if you or someone related (spouse/children) buy back the same shares (sold for a loss) within 30 days of the transaction date.

So, to sum up tax-loss selling:

  • Sell your losing investments.
  • Wait 30 days.
  • Buy back said losers.
  • Use the capital losses to cancel/reduce your capital gains on your tax return.
  • Rinse, repeat!

Use your losing investments to fund your RRSP/TFSA

As we just saw above, tax-loss selling is a great strategy to reduce your tax owing. But did you know that you can “supercharge” this strategy by buying back the same investments in an RRSP or TFSA? The process is exactly the same as we just described: sell your losers, wait 30 days, then buy them back. The only difference is that you buy back the same investments in your RRSP/TFSA. By doing so, you optimize your tax return in 3 ways:

  • By triggering tax-loss selling, you have created a capital loss that you can use to reduce your capital gains (see section above).
  • By buying back the investments in an RRSP, you can claim an RRSP deduction on your tax return, which reduces your taxable income and further reduces your tax owing (no such deduction for a TFSA).
  • By buying back the investments in an RRSP or a TFSA, you are now sheltering your future gains from being taxed*.

*For an RRSP, your tax on these investments is deferred until you actually withdraw the funds at retirement. For the TFSA, your gains are tax exempt.

Now that’s win-win-win!

This strategy can also be particularly handy if you don’t have the cash to fund your RRSP/TFSA, but would like to do so in the short-term (for example, during the first 60 days of the following year for an RRSP, with a deduction on the prior year’s tax return).

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