Canadain Tax Loss Selling Guidelines
Using losses has tax limits
Repurchasing stock market losers can break the rules
Jonathan Chevreau
Financial Post
Through most of the bull market, you didn't hear much about year-end tax-loss selling. Losses were few and far between.
This year is shaping up differently, particularly for those who have absorbed losses in Internet stocks or broadly based technology funds tied to the Nasdaq Stock Market. Investors who bought Nortel Networks Corp. near the top, or did the same with Canadian index funds linked to Nortel's fortunes, may also be looking at net losses for the year. No one wants to lose money deliberately, but there is some consolation in owning a few losing issues -- the losses can be used to offset other profitable trades, if you have them.
Of course, there are only "paper" losses until you actually sell the securities. The deadline for showing capital losses and gains on your books is Dec. 31, if you plan to use them when filing in April, 2001, for the 2000 tax year.
Technically, the real deadline for showing capital gains and losses on your books is a few days earlier, says Paul Hickey, national tax partner for KPMG. This is because most stock and bond market transactions normally settle three business days after the trade is entered.
But before you crystallize (or realize) your losses, make sure you and your advisor understand the superficial loss rules.
You may think to yourself, "I'll sell my Nortel near the end of the year, realize the loss for tax purposes, then repurchase it while it's still at bargain prices." If you try that within a 30-day period, the Canadian Customs and Revenue Agency (CCRA, formerly Revenue Canada) will disallow the declared loss, considering it a " superficial" or unreal loss.
The superficial loss rules are another one of those arcane concepts whereby the authorities manage to disallow what otherwise may seem to be a clever tax dodge.
The situation is not unlike the "heads we win, tails you lose" General Anti-Avoidance Rules, whereby the CCRA may disallow complex but legal transactions if they were motivated solely by tax avoidance.
In the case of superficial losses, the tax authorities don't need to take recourse to GAAR. The Income Tax Act says you can't take a loss on a particular stock (in a taxable plan, typically), simultaneously repurchase it and use the loss to offset capital gains elsewhere. You have to wait 30 days between the transactions if you wish the loss to be considered "bona fide" for tax purposes.
Section 54 of the act states a loss will be labelled superficial if you-- "or someone affiliated to you" -- repurchases the investment within 30 days either before, or after, your sale of the investment.
There is, however, a way around this. You can sell a stock in a taxable account and repurchase it simultaneously in your registered retirement savings plan and it won't be considered a superficial loss, confirms Colette Gentes-Hawn, CCRA spokeswoman.
The difference revolves around the interpretation of the term "affiliated." Leigh Vyn, tax manager at The WaterStreet Group, says affiliated persons include you, your spouse or your corporation, but do not include your parents, children, nieces or nephews.
The definition of "affiliated" in the Income Tax Act makes no mention of an individual being affiliated with a trust, and an RRSP is a trust. Therefore, she concludes in a recent article in Canadian Shareowner, "you can sell your investment on the open market for a loss, use that loss against any capital gains, and then use the proceeds to contribute to your RRSP. Once inside your RRSP, you can use that cash to repurchase the investment."
As cyberpundit Bylo Selhi notes, a taxable account and a registered account are two completely separate entities, owned by two separate persons-- you in the former case and a trustee in the latter. "Hence there's no problem selling a security in one and buying the identical security in the other."
Note, however, that all this does not mean you can transfer a losing stock to your RRSP and reap the same tax benefits. Even though the net effect is almost identical, the tax treatment is different. Vyn says "when you make a contribution in kind to your RRSP, you are deemed to have disposed of the asset at its current fair market value. If the asset has declined in value, there will be a capital loss. The problem is that this loss is denied."
If the shoe were on the other foot and you transferred a stock with an accrued gain, the CCRA would tax it. In the case of the loss, since it would be denied, "you're better off selling the asset, triggering the loss, and contributing the cash proceeds."
There may be more complex variations for those operating completely within a taxable account. One reader suggests it may be possible to sell the loser and simultaneously purchase a call option more than 30 days out to ensure future ownership.
KPMG's Paul Hickey says the latter gambit may not succeed because the superficial loss rules say the loss is denied where you or someone affiliated to you purchases the investment or had a right (which is what a call involves) to acquire the substituted property at the end of the period. "You have to tread very carefully if you're trying to dance around specific anti-avoidance rules -- they're not for the faint of heart."
jchevreau@nationalpost.com |
