Financial Planning

It’s important for clients to understand the opportunities they have from a tax planning perspective, but not to let tax decisions override everything else

By Craig Wong |

Thanks to a rally this fall, the Toronto Stock Exchange is up for the year so far, but that doesn't mean your clients don't have any losers in their portfolios.

Now might be the time to cull those picks that haven't worked out and use them to offset the taxes owed on the winners, tax experts say.

Jamie Golombek, managing director of tax and estate planning at CIBC, says it has been a great year in the market for many, but that doesn't mean investors don't have losing stocks that could be sold.

"If you can do it before the end of the year, you're going to able to use that capital loss to offset other capital gains that you might have realized earlier this year," he says.

Even if a client doesn't have any capital gains this year, taking a loss now can still save money if the client had had capital gains in recent years or expects to have them in the future.

An investor's losses must first be applied to any capital gains the investor has in the year the loss is incurred, but once they have all been offset, the rest of the losses can be either carried back up to three years or saved to offset capital gains in future years. That means if a client had a big capital gain recorded in 2014, this is the last chance to offset it with a loss.

"What you're looking for is the ability to either reduce a gain this year which would save you tax or carry it back to a prior year and actually request a refund," says Bruce Ball, vice president for tax at CPA Canada.

Ball notes there are some limits.

"You have to make sure that you don't have a loss that is going to be denied," he says, noting that the Canada Revenue Agency will deny what it calls superficial losses.

An investor can't rebuy the same stock within 30 days of selling it because it will be ruled a superficial loss and the claim will be denied.

That means if an investor sold shares in a company for a loss, the investor or anyone affiliated with that investor — such as a spouse — can't buy the same shares until 30 days after the sale settles.

The sale also has to settle by the end of the year.

Gabriel Baron, a tax partner at EY, says it's important for investors to be proactive and look at the whole picture when working with a tax professional.

"Tax is one aspect of an overall financial plan, it shouldn't be the only aspect of the plan," he says.

Baron says it's important to understand the opportunities a client has from a tax planning perspective, but not to let tax decisions override everything else.

Selling investments just to trigger a loss may not be a client's best decision, Golombek says.

"Don't let the tax tail wag the investment dog."