It’s been a tough year for markets, but there could be a silver lining for tax-efficient planning.
With major stock and bond markets in negative territory, investors have more opportunities for tax-loss selling, said Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth, in a recent interview.
Tax-loss selling — which involves selling securities or funds to realize a loss — can provide an opportunity to recoup tax paid on capital gains in the past, Golombek said, or eliminate tax on capital gains in the future.
“You take that loss, you apply that against any capital gains, and you reduce the amount of tax payable this year,” he said.
Because investors can carry losses back three calendar years, Golombek said to look at 2019 first. If there are any losses, there could be an opportunity for investors to get back some capital gains tax reported on their 2019 tax return. However, he said to watch out for securities purchased in a foreign currency, as the gain or loss may be larger or smaller than anticipated once the foreign exchange rate is taken into account.
As with any tax strategy, the CRA has rules when it comes to tax-loss selling. Investors need to be mindful of the superficial loss rule, which prohibits the repurchase of an identical security within 30 days of the tax-loss sale. The rule also applies to a client’s spouse or partner, and to a trust such as an RRSP, RRIF, TFSA or RESP where the client or spouse is a majority beneficiary.
Golombek also highlighted his standard year-end tax tips, such as making sure clients who turned 71 in 2022 know they only have until year-end to make final contributions to their RRSPs before converting them to RRIFs or annuities.
In addition, he noted that the prescribed rate will rise to 4% from 3% on Jan. 1, so there is still time to lock in a spousal loan or a loan to a family trust at 3% before the end of the year.
With regards to children, Golombek said there is no deadline for RESP contributions, so clients can look out for options or opportunities to catch up on previous years.
“That being said, if a child or grandchild turned 15 this year, this is their final chance if they don’t have an RESP to put in at least $2,000 this year, and get grants for this year and make them eligible for the next couple of years,” he said.
On the other side of RESPs, Golombek said to keep educational assistance payments (EAPs) in mind as they are taxable when withdrawn from an RESP by a student. Golombek said December is a good time to look at the student’s income.
“You want to check if they have any part-time income — maybe they have summer job income — and then look at their total situation,” he said. “Have they taken out enough EAPs from the RESP to use up their basic personal amount? Again, that is use it or lose it each year, and that is something that students might want to take advantage of.”
Lastly, December is also the season for year-end donation planning, Golombek said. Clients may want to consider donating some of the biggest winners in a portfolio to a registered charity.
“Get your tax receipt equal to up to 50% of the value, but then also pay no capital gains tax on the value of that charitable gift,” he said.
This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.