Rob Clark BA (Econ.), CFP®, MBA
Over time, it’s inevitable that some investments will underperform, with promise turning to disappointment. This year, due to COVID-19, there’s an increased chance of underperformance – especially for holdings in the hospitality, retail, entertainment and transportation sectors. However, there can be a silver lining to an investment losing value.
When the current price of a non-registered investment has fallen below its original cost, you can sell the investment and realize a capital loss. That loss can be used to offset taxable capital gains, which means you turn the capital loss into tax savings.
Capital losses must first be applied to offset any capital gains in the current tax year. Remaining losses can be used against capital gains from the previous three years, resulting in a refund of taxes paid. Any losses still remaining can be carried forward indefinitely.
Do keep in mind that the sale must be a sound investment decision. The strategy shouldn’t be implemented solely for the tax advantage.
If you want to take a capital loss on your 2020 tax return, you must sell the investment and settle the transaction before year-end, so allow for some extra days. Also note that you or an affiliated entity or person, such as your spouse, cannot purchase the same investment within 30 days before or after the sale date – or you won’t be allowed to claim the capital loss.
If you want to discuss the tax-loss selling strategy to reduce your taxes, please give us a call.