If your client sells an asset, she’ll have to pay tax on half her gains. And if another investment lost money, it can offset her capital gains and she’ll only pay tax on half of any remaining profit.
This strategy is called tax loss harvesting. Although it commonly applies to securities, losses from personal loans, private business investments or real estate investments could also qualify.
To do this, carry back losses to the year your client had the highest income. If there are still losses to use, then carry them back to the year with the highest tax rate.
Or you can carry forward to offset future gains. Capital losses can be carried forward indefinitely. Upon your client’s death, any unclaimed amounts can be applied against capital gains or ordinary income.
Here are seven tips to help your client tax loss harvest.
1. Monitor your client’s portfolio for gains and losses.
2. Discuss whether to sell underperforming securities. Does your analysis shows the stock will recover soon? If no, then go ahead and sell. If yes, or you’re not sure, hold it. “You don’t want your tax strategy to drive your investment strategy,” says Jason Safar, tax services partner at PWC.
3. To qualify for 2014 taxes, your client has until Dec. 24 to sell.
4. To claim the loss, complete line 127 of Schedule 3 of your client’s personal return.
5. To apply past capital losses, enter that amount onto line 253 of the return.
6. To apply losses from the current year to taxes from the past three years, fill out a T1A Request for Loss Carryback.
7. CRA will automatically track carry-forward amounts based on line 127 of Schedule 3. The resulting carry-forward will be listed on your client’s notice of assessment.
How to tax loss harvest>