Tax Loss Selling

Over the last few weeks, the financial market has taken a downturn amidst fears over Coronavirus.

Understandably, you are concerned with your portfolio, it’s important to stay level-headed to avoid making financial missteps. However, staying level-headed doesn’t necessarily mean you sit there and do nothing. In fact, one consideration you can look is taking an active tax management approach.

Tax loss selling is a strategy to crystallize or realize any capital losses in your non-registered accounts so it can be used to offset any capital gains. There is no benefit to selling in your tax free savings account (TFSA) or registered retirement savings plan (RRSP).

You can apply capital losses back 3 years or carry them forward indefinitely, therefore we’ve outlined several situations that make sense for tax loss selling.

To better understand how tax-loss selling works, imagine a scenario in which someone invests $100,000, putting $50,000 in “Investment A” and $50,000 in “Investment B.”

At the end of one year, Investment A has risen by $10,000 and is now worth $60,000. Investment B has declined by $10,000 and is now worth $40,000.

Without tax-loss selling, the investor has a realized gain of $10,000 from Investment A, and has a potential tax bill of $1,500 (assuming he or she sells the shares and pays the 15% capital gains tax on the profit).

On the other hand, with tax-loss selling, selling Investment B to offset gains from Investment A. At the end of the year, instead of paying a $1,500 tax, the investor only has a potential tax bill of $0, for a potential tax savings of $1,500.

With the investor’s tax liability reduced by $1,500, that savings becomes money that can be invested back in the portfolio, used to maximize RRSP contributions, pay off debt, or spend as one pleases. Please see the infographic below.

What Situations make sense for tax loss selling?

  • If you have an investment with a considerable capital gain, review through your current investments to see if there are any investments to sell at a loss.

  • Receiving a tax refund for a previous year. Keep in mind, you can apply capital losses back 3 years, therefore if you sold a property within the last 3 years for a considerable gain and paid the tax. This year, you could sell other investments at a loss and apply them back and get some tax paid back.

  • For tax deferral, with tax losses you can apply these losses back 3 years or carry them forward indefinitely, therefore you may want to trigger a loss today because if you are planning to sell that property in the next year or so, it may rebound and therefore you will lose the chance to offset the gains.

  • Lastly, you may have an investment in your portfolio that’s a dud. It might be time to move on and put your money into a different investment so that you can apply the loss in the future.

Tax Loss Selling is Complicated

There are specific conditions required by CRA that must be met in order for this strategy to work such as making sure your loss is not declared a “superficial loss” (these rules are very restrictive). A superficial loss is when you sell and trigger a capital loss, you cannot deduct the loss if you or an affiliate purchase an identical security within 30 days before or after your settlement date.

Another condition is that the sale of assets is prior to the year-end deadline (this varies by calendar year). You also need to make sure you have accurate information on the adjusted cost base (ACB) of your investment. When you file your taxes, any losses must be first used to offset capital gains in the current tax year, then any remaining losses can be carried back.

Before engaging in tax loss selling, you should contact us directly so we can make the strategy works for you.

Nova Scotia Budget Highlights 2020

Corporate

General Corporate Income Tax Rate Reduction

Effective April 1, 2020, the province will reduce the general corporate income tax rate from 16 per cent to 14 per cent.

The general corporate income tax rate in Nova Scotia has been set at 16 per cent since 1990. From 1982 to 1989 the rate was 15 per cent. The reduction by 2 percentage points will provide businesses with $70.5 million in 2020–21.

Small Business Corporate Income Tax Rate Reduction

Effective April 1, 2020, the province will reduce the small business corporate income tax rate from 3.0 per cent to 2.5 per cent.

From 2011 to 2014 the small business corporate income tax rate was reduced by one-half percentage point each year—dropping the rate from 5 per cent to 3 per cent. The small business rate is available on the first $500,000 of active business income by Canadian Controlled Private Corporations (CCPCs) with taxable capital of less than $10 million. The rate reduction will provide small businesses in the province with $10.5 million in 2020–21.

Extend Digital Media Tax Credit (DMTC)

The DMTC is a refundable corporate income tax credit. It was introduced in 2007 to encourage the employment of skilled Nova Scotians and to foster the development of an interactive digital media industry in the province. Since its introduction, the province has provided almost $54 million in tax credits across 675 applications.

The DMTC was legislated to expire on December 31, 2020, but new legislation will be introduced as part of Budget 2020–21 to extend the tax credit for five years—to December 31, 2025.

The province will review the DMTC in consultation with the industry and stakeholders to ensure that the tax credit remains relevant and effective in an ever-changing digital technology environment.

Extend Digital Animation Tax Credit (DATC)

The DATC is a refundable corporate income tax credit. It was introduced in 2015 to provide support for the production of digital-animation productions in the province. The tax credit, together with the Film and Television Production Incentive Fund, was put in place to replace the former Film Industry Tax Credit. Since its introduction, the province has approved Part A applications totaling almost $45 million across 45 applications.

The DATC was legislated to expire on June 30, 2020, but new legislation will be introduced as part of Budget 2020–21 to extend the tax credit for five years—to December 31, 2025.

The province will review the DATC to ensure that the tax credit continues to support the digital animation industry.

Personal

Increase Tobacco Taxes

Effective February 26, 2020, the province will increase the tax rates on all tobacco products sold in Nova Scotia.

The tax rate on cigarettes and tobacco sticks will rise from 27.52 cents per unit to 29.52 cents per unit.

The tax rate on fine cut tobacco will rise from 26 cents per gram to 40 cents per gram, while the tax rate for other tobacco products will rise from 18.52 cents per gram to 40 cents per gram. Nova Scotia is the only province that has separate rates for fine cut and other tobacco, and the rate increase brings the province in line with other Canadian jurisdictions. It also treats fine cut tobacco similarly to cigarettes.

The tax on cigars will rise from 60 per cent of the suggested retail selling price to 75 per cent. Again, this is in line with tax rates applicable to cigars across the country.

The tax increases are expected to generate approximately $17.4 million in revenues for 2020–21.

Implement Vaping Products Tax

Effective September 15, 2020, the province will implement a tax on all vaping products

sold in Nova Scotia.

Vaping substances, including those that do not contain nicotine, will be taxed at the

rate of $0.50 per millilitre. The province has previously announced that it will ban

flavoured vaping liquids effective April 1, 2020. This is consistent with the province’s ban

on flavoured tobacco products. Vaping devices and their components will be taxed at a

rate of 20 per cent of their suggested retail selling price. Cannabis vaping substances

are taxed under the cannabis tax.

All retailers, wholesalers, and manufacturers of vaping products will be required to be

licensed to sell their products in Nova Scotia, effective July 1, 2020. Vaping product

taxes are projected to be $2.3 million in 2020–21.

The full version of the Nova Scotia Budget can be found here: https://novascotia.ca/budget/

RRSP Tax Savings Calculator for the 2019 Tax Year

RRSP Tax Savings Calculator

RRSP Deadline: March 2, 2020

This is the deadline for contributing to your Registered Retirement Savings Plan (RRSP) for the 2019 tax filing year. You generally have 60 days within the new calendar year to make RRSP contributions that can be applied to lowering your taxes for the previous year.

If you want to see how much tax you can save, enter your details below!

Please don’t hesitate to contact us on how we can help you achieve your retirement dreams.

2019 Federal Budget

2019 Federal Budget

The 2019 budget is titled “Investing in the Middle Class. Here are the highlights from the 2019 Federal Budget.

We’ve put together the key measures for:

  • Individuals and Families

  • Business Owners and Executives

  • Retirement and Retirees

  • Farmers and Fishers

Individuals & Families

Home Buyers’ Plan

Currently, the Home Buyers’ Plan allows first time home buyers to withdraw $25,000 from their Registered Retirement Savings Plan (RRSP), the budget proposes an increase this to $35,000.

First Time Home Buyer Incentive

The Incentive is to provide eligible first-time home buyers with shared equity funding of 5% or 10% of their home purchase price through Canada Mortgage and Housing Corporation (CMHC).

To be eligible:

  • Household income is less than $120,000.

  • There is a cap of no more than 4 times the applicant’s annual income where the mortgage value plus the CMHC loan doesn’t exceed $480,000.

The buyer must pay back CMHC when the property is sold, however details about the dollar amount payable is unclear. There will be further details released later this year.

Canada Training Benefit

A refundable training tax credit to provide up to half eligible tuition and fees associated with training. Eligible individuals will accumulate $250 per year in a notional account to a maximum of $5,000 over a lifetime.

Canadian Drug Agency

National Pharmacare program to help provinces and territories on bulk drug purchases and negotiate better prices for prescription medicine. According to the budget, the goal is to make “prescription drugs affordable for all Canadians.”

Registered Disability Savings Plan (RDSP)

The budget proposes to remove the limitation on the period that a RDSP may remain open after a beneficiary becomes ineligible for the disability tax credit. (DTC) and the requirement for medical certification for the DTC in the future in order for the plan to remain open.

This is a positive change for individuals in the disability community and the proposed measures will apply after 2020.

Business Owners and Executives

Intergenerational Business Transfer

The government will continue consultations with farmers, fishes and other business owners throughout 2019 to develop new proposals to facilitate the intergenerational transfers of businesses.

Employee Stock Options

The introduction of a $200,000 annual cap on employee stock option grants (based on Fair market value) that may receive preferential tax treatment for employees of “large, long-established, mature firms.” More details will be released before this summer.

Retirement and Retirees

Additional types of Annuities under Registered Plans

For certain registered plans, two new types of annuities will be introduced to address longevity risk and providing flexibility: Advanced Life Deferred Annuity and Variable Payment Life Annuity.

This will allow retirees to keep more savings tax-free until later in retirement.

Advanced Life Deferred Annuity (ALDA): An annuity whose commencement can be deferred until age 85. It limits the amount that would be subject to the RRIF minimum, and it also pushes off the time period to just short of age 85.

Variable Payment Life Annuity (VPLA): Permit Pooled Retirement Pension Plans (PRPP) and defined contribution Registered Retirement Plans (RPP) to provide a VPLA to members directly from the plan. A VPLA will provide payments that vary based on the investment performance of the underlying annuities fund and on the mortality experience of VPLA annuitants.

Farmers and Fishers

Small Business Deduction

Farming/Fishing will be entitled to claim a small business deduction on income from sales to any arm’s length purchaser. Producers will be able to market their grain and livestock to the purchaser that makes the most business sense without worrying about potential income tax issues. This measure will apply retroactive to any taxation years that began after March 21, 2016.

To learn how the budget affects you, please don’t hesitate to contact us.