When my daughter was finally able to drive on her own, she sped off to teenage freedom, reporting to school, work, and play outside of our watchful eyes. We barely saw her for the next week until she stormed in to the kitchen a few days later and announced: "That car needs gas," as she headed to the fridge for a snack.
A few days later she got her first pay cheque from her job as a lifeguard at the city and was horrified. "The government took my money! They didn't even ask! They just took it!"
Taxation, like fueling the car, is an unpleasant, but necessary fact of life.
As year-end approaches, taking some time to review your financial affairs may yield significant tax savings. Some common year-end tax planning strategies are summarized below.
Opportunities to Reduce Your 2013 Tax Bill
This is installment one of a four-part series.
Review Your Portfolio for Tax Loss Selling Opportunities
Even the most patient buy-and-hold investor will be wise to take a look at this. If you have sold some assets and realized capital gains during the year, and you are holding other securities with unrealized losses, consider selling them as well. This "tax loss selling" strategy of selling securities at a loss to offset other capital gains realized during the year is a common year-end tax planning technique. Review your portfolio to see if any investments are in a loss position and no longer meet your investment objectives. If the investment still has strong fundamentals and meets your investment objectives, consider all costs, including transaction costs before selling investments solely for the purpose of triggering the tax loss.
When disposing of a security, the sale for Canadian tax purposes will be deemed to have taken place on the "settlement date". Assuming the normal three-day settlement period, in order to utilize a tax loss selling strategy for the 2013 tax year, transactions must be initiated by December 24, 2013 for Canadian securities and by December 26, 2013 for U.S. securities in order to settle during 2013. Note that since December 26, 2013 is a holiday in Canada, you may also want to consider placing any U.S. transactions by 1:00pm on December 24, 2013 to ensure a 2013 settlement. Canadian and U.S. option transactions have a one-day settlement, therefore option transactions must be initiated by December 30, 2013 to ensure 2013 settlements.
Take my advice and forget all the finite detail in the preceding paragraph. I have been in this business long enough to know that trying to get anything done over the Christmas break is like trying to tell your daughter to hurry up in the bathroom. Just don't. Look at the above timing and then give yourself at least a week's buffer. For the tax-loss selling that is...
Okay, maybe for the bathroom too.
Superficial Loss Rules
In order to ensure that your capital loss can be claimed, you must be aware of the "superficial loss" rules. A superficial loss will occur when a security is sold for a loss and both of the following occur:
i) the identical property is acquired or re-acquired during the period beginning 30 days before the disposition and ending 30 days after the disposition of the original security; and
ii) at the end of the above period, you still hold the identical property.
Among other situations, the superficial loss rules will also apply if you sell an investment at a loss and it is acquired by an affiliated person during the time period described above. An affiliated person includes your spouse, a corporation controlled by you and/or your spouse, or a trust of which either you or your spouse is a majority-interest beneficiary.
If you trigger a superficial loss your capital loss will be denied. The denied loss amount will then be added to the cost base of the substituted investment effectively resulting in your original cost base being transferred to the newly repurchased shares. However, if you or an affiliated person delays the repurchase until after the 30-day period, you may claim the capital loss.
Note that the 30-day waiting period is counted from settlement day of sale to settlement day of repurchase and includes all holidays and weekends. Furthermore, the superficial loss rules also apply to mutual funds sold at a loss.
Again, a word to the wise: If you plan to repurchase that security, don't try to cut it too close. Give it a sufficiently wide margin. Perhaps an even bigger concern is why you would try to time the market like that at all. That can be a humbling experience for even the most seasoned of investors.
Selling the loss security in a non-registered account and repurchasing the identical security in a registered account where you or your spouse is the annuitant/subscriber (e.g., RRSP/RRIF/TFSA/RESP) within 30 days and owning it on the 30th day after the sale will also cause your capital loss to be denied. Furthermore, when a superficial loss is triggered on the transfer of the loss security to a registered account this will result in the capital loss being permanently lost.
Gifting the loss security in-kind to an individual who is not your spouse (for example, a minor or adult child) will allow you to claim the capital loss as this gift is to a non-affiliated person the superficial loss rules will not be triggered.
There are many more strategies which we will cover over the next few short weeks as year-end approaches.
This information is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy.
Mark Ryan is an advisor in Prince George with RBC Wealth Management, Dominion Securities, and can be reached at [email protected].
