Prior to the end of each tax year, Financial and Investment Advisors review the portfolios of their clients with an eye to “Tax Loss Selling”. The idea behind this annual review is multifold but in November and December, the focus becomes which investments have lost value, and does it make sense to sell the investment to offset gains earned on other investments.
Due to changes in the Income Tax Act effective for the 2024 tax year, this annual process may have different effects on the client’s 2024 tax return than other years.
Capital Gains and Losses – A Review
For tax purposes capital gains and losses receive preferential tax treatment. In general, Capital Gains are taxed on 50% of the realized gain, while realized Capital Losses maybe deducted against realized Capital Gains.
The result is income tax is paid on one-half of the net realized gain at the client’s marginal tax rate.
What’s New!
Effective June 25, 2024 this changed. The Canadian Government implemented a two-tiered methodology resulting in an increase to Capital Gains taxes exceeding $250,000 during the taxation year. Net Capital Gains realized in a tax year from all sources will now be taxed as:
| Net Capital Gain | Inclusion Rate | Taxable Capital Gain |
| First < $250,000 | 50% | 50% of Net Gain |
| Balance > $250,000 | 66.67% | 66.67% of Net Gain |
Assuming a net Capital Gain realized in September 2024 of $300,000, it would look like this:
| Net Capital Gain | Inclusion Rate | *Old Rules | *New Rules |
| $300,000 | 50% | $150,000 | n/a |
| $250,000 | 50% | $125,000 | |
| $50,000 (balance) | 66.67% | $33,350 | |
| $150,000 | $158,350 |
Now, let’s assume that there is an investment within the portfolio that has lost a value of $75,000:
| Net Capital Gain | Inclusion Rate | *Old Rules | *New Rules |
| $225,000 (net amount) | 50% | $112,500 | n/a |
| $225,000 (net amount) | 50% | n/a | $112,500 |
| $112,500 | $112,500 |
Let’s now assume that this is a joint account between spouses (and each spouse contributed equally to the portfolio. What happens then?
| Net Capital Gain | Inclusion Rate | *Old Rules | *New Rules |
| $300,000 | 50% | $150,000 | n/a |
| $150,000 (Taxpayer) | 50% | $75,000 | Zero |
| $150,000 (Spouse) | 50% | $75,000 | Zero |
| $150,000 | Zero |
As you can see, there are many different potential scenarios that can result in achieving the best overall result for taxpayers. It will become important this year, and into the future, that all potential scenarios are considered.
Remember the Potential Traps!
Superficial Losses – The superficial loss rules state that if you sell a capital property at a loss and reacquire the property within 31 days, the loss claimed is disallowed.
Attribution – The attributions rules within the Income Tax Act state that the taxpayer who funded the investment in the first place declares the income, capital loss /gain on the investment.
Carry-forward / Carry-back – Capital Losses can be carried forward for use in future years. Capital losses incurred in the current tax year can be carried back and applied against capital gains incurred in the prior three years.
Real Estate – and other capital properties that may incur gains or losses are included into the Net Capital Gain/Loss amount for the purposes of the $250,000 inclusion factor.
1994 Capital Gains Election – was available allowing a taxpayer to realize a capital gain of up to $100,000 tax exempt. This election, claimed using form T664 in 1994, allowed a tax-exempt increase in the cost base of a property (usually a cottage) thereby reducing the capital gain when sold. Was the election made in 1994?
As in most cases, tax planning is required in order to ensure that the taxpayer is paying the least amount of income tax allowable within the legislation. As taxation continues to become increasingly complicated with many moving parts, seeking the services of a professional tax planner becomes imperative.
Article originally posted at The Accounting Place – https://theaccountingplace.ca/taxes/harvesting-capital-gains-losses/ For further information regarding your personal situation, please contact your Financial Advisor.