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With 2013 coming to a close, it’s a good time to see if you’ve done everything possible to minimize the tax bite for clients and maximize their net earnings. Part of that’s done with tax-loss harvesting. After ensuring the sale fits your client’s portfolio goals, check these eight things:

01 The type of income

Employees who exercise or dispose of share or option awards received through their jobs may be earning employment income (and not capital gains). That income can’t be offset by capital losses. Find out how the client came to own the shares, especially for large, single stock holdings.

Read: How to tax-loss harvest

02 The lifetime capital gains exemption

If she has a gain from selling a private company, or a farm or fishing property, ask if any part of the gain qualifies for the lifetime capital gains exemption ($750,000 today and rising to $800,000 in 2014).

03 Whether the loss stems from a business investment

If a client loses money on a private investment, determine if the loss qualifies as an allowable business investment loss (ABIL) that can be used against any source of income in the year claimed. ABILs can restrict future claims of capital gains exemptions, so if your client otherwise holds private company investments, it may be possible to move the investment to a holding company and claim the ABIL there instead.

Read: The pros and cons of foreign dividends

04 Whether losses are superficial

This happens when a taxpayer sells a security to trigger a loss, but then she, her spouse, or a corporation or other entity controlled by either of them repurchases that same security 30 days before or 30 days after the security was sold.

If it falls within that window and that other person continues to hold the security at the end of the period, the loss is deemed superficial and denied in the first person’s hands.

The loss is added to the cost of the other identical investment held by the second person or entity. ETFs that track the same indices are generally considered identical property by CRA, even if they’re from different manufacturers.

05 Whether superficial loss rules may work in the client’s favour

If one spouse has significant gains and the other holds losing investments, consider selling the shares in the weaker portfolio and having the other spouse acquire the same shares within 30 days. The denied loss will be added to the cost base of the other spouse’s holding, allowing for a potential future sale at a loss.

06 Loss carry-forward balances

Check these balances against the client’s notice of assessment, or ask the client’s accountant, to ensure you don’t already have losses to offset gains.

07 The client’s marital status

If your client is going through a marital breakdown, she can trigger losses when transferring investments to the spouse she’s separating from or divorcing.

Read: Get clients to sign a prenup

08 The client’s charitable intentions

Encourage philanthropic clients to donate publicly listed securities with accrued gains to fulfill their pledges. The income for such gains is often nil.

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client friendly

Stella Gasparro, CPA, CA, is a tax and assurance partner at MNP LLP.

Originally published in Advisor's Edge

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