The Tax Blog for Smart Canadians

We find ourselves in unprecedented times with the COVID-19 pandemic.

With fear in the air, our natural instincts tell us to sell our investments and to hoard as much cash as possible. But is that a good idea? And what are the potential tax consequences of panic selling?

To sell or not to sell in a panic

Watching the stock market drop by double digits daily can be gut wrenching. Conventional wisdom would dictate that the right thing to do is to sell as quickly as possible in order to preserve your investments. But is that the best decision you can make in the long term?

When looking at long-term historical returns of the stock market, the data shows that it pays to wait it out. One interesting statistic indicates that for the period of 1996–2016, if you missed the 20 best trading days (US S&P 500), your annualized returns dropped from 7.7% to 1.6%. This statistic includes the negative returns of bear markets such as the dotcom crash and the great recession. It’s amazing the difference a few days can make!

What these statistics reveal is that you really cannot time the market. For superior returns, your ally is time spent in the market, and not timing it.

This article’s intent is not to offer investment advice. You should always consult a certified financial advisor before making any decisions. The statistics presented above should give you “food for thought” before making rash decisions about your portfolio.

Tax consequences of panic selling

The tax consequences depend on where you hold your investments. If they are in non-registered accounts (not RRSPs/TFSAs), your losing investments will be considered capital losses and as such, they can be deducted against any taxable capital gains earned for the year. At the very least, you can make your losing investments tax deductible on your tax return.

If they are held in tax-sheltered accounts such as RRSPs or TFSAs, your losing investments cannot be deducted since these funds are sheltered from taxation (tax-free in TFSAs, tax deferred in RRSPs). As advantageous as these accounts are when they’re gaining, they do nothing for you tax-wise when they’re losing money.  

It’s too late! I’ve already panicked and sold for a loss. How can I still maximize my tax situation?

If you decide to dip your toes back into the market, and more specifically to buy back into the same companies from which you sold shares held in a non-registered account, make sure to avoid a superficial loss. To avoid this trap, you (or your spouse) must wait 30 days before buying back the same stock. Once the 30 days have passed, you can deduct your capital loss against any taxable capital gain for the year.

If you have no taxable capital gains in the year, you can also carry back your capital losses to the three prior years and deduct them retroactively, as long as you had taxable capital gains in those years.

Another way to optimize your losing investments from non-registered accounts is to use the funds received to buy back into the market, but this time in a tax-sheltered account like an RRSP or a TFSA. This allows you to use the available cash to make a tax-deductible contribution (in an RRSP), or to keep exempt from tax any future gains from these funds (in a TFSA). We discussed a detailed procedure to do this in a previous UFile blog.

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