Thanks for all of the emails on the most recent articles on tax loss selling. Tax loss selling can be very confusing and complicated and the best advice I can give readers is to seek professional help.
A few more thoughts on tax loss selling
- Capital losses can only be written off against capital gains. You cannot write capital losses off against other types of income.
- You must use capital losses against capital gains in 2001 first. Any net capital losses can be carried backwards.
- You can apply the net capital losses against any of the capital gains in the three preceding years.
- Take a look at line 127 of your tax return to see if you have taxable capital gains in 1998, 1999, and 2000.
- You cannot use losses inside an RRSP. You do not pay tax on any income or growth in the RRSP.
- Be aware of the superficial loss rules. You must be out of an investment for 30 days in order to qualify for a capital loss. If you try to sell and investment and then buy it back within the 30 days, you will be denied the loss.
- You must take time to know and understand the Adjusted Cost Base (ACB). In Canada, we recognize the average cost base for the purpose of calculating the gains or losses.
- If you transfer investments with losses ‘in kind’ into an RRSP as your contribution, the loss is denied and cannot be used against capital gains.
“In kind” RRSP contributions
Making an RRSP contribution before December 31, 2001 might be a perfect strategy for a number of reasons. It looks like 2002 might shape up to be a pretty good year for the markets. Economic news is improving, interest rates continue to drop, corporate earnings look more promising and investor sentiment is improving.
I recently had a client ask me if it would be beneficial to trigger losses in a non-RRSP portfolio by transferring them “in kind” into the RRSP. On the surface, this strategy sounds great because you get to trigger the loss and deduct them against capital gains in past years. Then you get to shelter the future investment growth inside the RRSP. Finally, you get the current deduction against income in the current tax year.
However, the CCRA has said that if the transfer of property with an accrued loss is used for an RRSP contribution, the loss is denied.
According to Jamie Golombeck, Vice President of Tax and Estate Planning at AIM Funds, there is a solution to this problem. My client should take the investment and transfer it to a money market fund, which will trigger the loss. Then he should transfer the money market fund to the RRSP to get the tax receipt. Once the fund is in the RRSP, you can buy back the original investment. Golombeck says “the CCRA confirms there is no superficial loss in this situation.”
Spousal RRSP contributions
Another reason you may want to make RRSP contributions before the end of the year is if you are nearing retirement, and you are planning to make a spousal RRSP contribution.
Under the attribution rules, you must be aware that if your spouse withdraws any funds in the year of a spousal contribution being made or in any of the two preceding calendar years, then the income will be taxed in the original donor’s name.
Let’s walk through an example. Ron and Margaret are nearing retirement. Ron wants to put money into a spousal RRSP this year because he is in a higher tax bracket than his wife. If Ron makes a contribution to a spousal RRSP before December 31st, his wife can access the funds in 2004. But if he makes the contribution in January or February, his wife will have to wait a full year until 2005 until Margaret can take out the funds with no attribution.
Keep in mind that the attribution rules do not apply if Margaret only takes out the minimum income in a RRIF or decides to purchase a life annuity. In this example, if Ron makes another contribution to a spousal RRSP in December of 2002, the three years is re-started.
I’ve always said that good tax planning goes a long way when you are dealing with investments and finance. Unfortunately the rules are very complicated. These examples will not apply to everyone. Be sure to consult a professional for specific advice on your situation.