Tax Managed Strategy 1
If you or your spouse¹ have realized capital gains in the last three years, consider selling an investment that has dropped in value to recover the taxes paid on those gains.
Stock market volatility may cause investors to worry about their investments. Many want to take action and reorganize their portfolios, even if they are in a loss position. Once the decision is made to crystallize losses, our capitalizing on capital losses strategy can be used to gain maximum tax benefit on portfolio losses. This strategy is based on carrying back any losses that exceed current year capital gains, to a previous year with net capital gains.
An in-depth look at the issue... and the opportunities
The Income Tax Act (Canada) requires capital losses to be first applied against capital gains realized in the current year. If there is any remaining balance, the net capital losses can be used to either reduce taxable capital gains in any of the three preceding years, or in any other future year.
The best strategy is to carry the losses back to the earliest year in which you have capital gains before it falls out of the three year window. For example, the earliest date allowed to carry back 2020 losses is 2017.
Transferring capital losses between spouses
If you don’t have capital gains this year or the previous three years, but your spouse does, it is possible to transfer capital losses to them.
First, the investment is sold to crystallize the capital loss. Immediately afterwards your spouse buys the exact same amount of the identical investment.
Your spouse then sells the investment after waiting at least 31 days. The capital loss realized on your sale will be denied under the superficial loss rules and instead added to your spouse’s adjusted cost base, thereby transferring the capital loss.
- Are selling their investments at a loss, and who have little or no capital gains in the current year
- Had capital gains, or their spouse had capital gains, in the past three years
To apply for a loss carry back, investors need to:
- Complete of Form T1A, Request for Loss Carryback
- Attach it to this year’s return
Canada Revenue Agency (CRA) will then automatically apply the losses to the previous year(s) requested on the form.
If you or your spouse repurchase property identical to that sold within the period that begins 30 days before and ends 30 days after the disposition, and still hold it on the 30th day after the disposition, then the capital loss on the original sale will be denied under the superficial loss rules. The denied loss is added to the adjusted cost base of the acquired property.
A trust version of a mutual fund is not identical to the corporate class version of the same mutual fund. Therefore, capital losses realized by the sale of a mutual fund trust will not be denied under the superficial loss rules if the same fund is purchased in a mutual fund corporation as you are purchasing a different legal structure.
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1 Includes a spouse or common-law partner as defined by the Income Tax Act (Canada).
Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the fund facts as well as the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value. Manulife Funds and Manulife Corporate Classes are managed by Manulife Investments, a division of Manulife Asset Management Limited. The Manufacturers Life Insurance Company is the issuer and guarantor of contracts containing Manulife segregated funds and the Manulife Investments Guaranteed Interest Contract (GIC). The commentary in this publication is for general information only and should not be considered investment or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. Manulife, Manulife Investment Management, the Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.