FreshSplash
With equity markets facing heightened volatility, investors may consider tax-loss harvesting as a way to offset some of their tax burden. Greg Bonnell speaks with Nicole Ewing, Director of Tax and Estate Planning at TD Wealth, about the specific factors to keep in mind.
Transcript
Greg Bonnell: It’s been a tough year for investors with most major markets well off their highs. And as we get into the final innings of the year, you might hear the term tax loss selling or harvesting thrown around. Joining us now to discuss what it actually means and how to approach it, Nicole Ewing, director of Tax and Estate Planning at TD Wealth. Nicole, welcome to the program.
Nicole Ewing: Thank you, Greg. Great to be here.
Greg Bonnell: So let’s talk about this. People are going to hear about it. Perhaps they haven’t done any tax loss selling before. But this year might give some people some opportunities. How do you approach that?
Nicole Ewing: Unfortunately, yes. So, one thing about tax loss harvesting, or tax loss selling, essentially is taking advantage of the opportunity to offset some losses against some gains. So hopefully, we have some gains as well, and we’re not just in a loss position. But we have the opportunity to essentially sell a stock that has not performed well and is less than its adjusted cost base, in which case we have a loss. We can then sell that, we realize our loss, and we can offset that then against other gains. We can carry it back for three years, we can carry it forward indefinitely, but it’s essentially a way of offsetting some of the poor performers against, hopefully, some of those that have done better at reducing then ultimately the tax that would have been payable on those gains.
Greg Bonnell: Right. So there is an opportunity there for investors, though, depending on what account they’re holding the investment in. I mean, once you start to get into the finery of it, it can get a little complicated.
Nicole Ewing: Well, it matters very much, because we only want to do this, of course, in our non-registered accounts. If we are trying to do tax loss selling or harvesting in a registered account on which we don’t pay tax, we’re not going to have the opportunity to use those losses against the gains, and we’ve essentially crystallized our loss and we don’t have an opportunity to get those funds back again. So yes, we only want to be doing this in our non-registered accounts.
And there’s a lot of potential things to think about. Like, what is your spouse doing? Is your spouse also selling? If so, you want to be aligned on that, because there’s rules called the superficial loss rules. And this essentially means if you sell a stock and reacquire it within 30 days, your loss will be voided and essentially won’t be recognized. But we also have, as married persons, if we’re filing, we need to be cognizant of what our spouse has done, because if they sell to crystallize their loss and we then buy that same stock in our own portfolio within 30 days, we could potentially be offset – and that’s not a great plan. So we do need some coordination with this, it’s not something to just take lightly.
Greg Bonnell: All right. I didn’t know about the spousal part of this. That’s very important.
Nicole Ewing: Surprise!
Greg Bonnell: How does this fit into a bigger strategy? I mean, obviously, someone may have an equity portfolio and think, I can do this, but obviously, holistically, there’s a lot more going on with someone’s financial plan.
Nicole Ewing: There is. And so we always want to take that holistic perspective. We don’t want to do things in isolation. It might seem like a great idea to do this, but if you are a business owner, for example, and you have a corporation with a positive capital dividend account balance that your accountant might be planning on doing some planning for you, you could undermine the other planning that your other professionals are keeping in mind. So we do want to look at it holistically as part of an overall strategy. This is a good time to start thinking about it. We start getting a sense of what gains we’ll have for the year. We do need to be mindful that this needs to be done before year-end. So we don’t want to wait til the very last minute, because things have to go through the process. So be mindful of it now, kind of think about your overall strategy, think about where you hold your assets, what accounts they’re in and what your other family members are doing, and really look at it from a holistic plan.
Greg Bonnell: You’ll definitely be heading up against the end of December faster than we know. We are already talking about Halloween. So as you enter this final stretch of the year – and it’s been quite a year, and quite a challenging year on many fronts – what other things should we be thinking about from a tax planning point of view?
Nicole Ewing: Well, I think we want to be thinking about what we might be taxed on but also what we might be spending. And so, if we need to be pulling out some income next year, is there an opportunity to do that in a more tax-effective way by perhaps taking that income this year instead of next? And as an example, we could take out of our – if we know we’re going to be accessing our TFSA account next year for whatever purchase, that the contribution room will reset on January 1. So instead of taking those funds out in the first few weeks of January, if we instead do that in December, it gives us an opportunity to have that contribution room reset, rather than needing to wait the entire year in order to do that. Charitable donations, of course, we just had Thanksgiving and a lot of families really thinking about what they’re grateful for. And that can often lead to discussions about charitable giving. Now is an ideal time to talk about that as well. If you do have the stocks that have gains on them, if you’re not doing the tax loss selling strategy, you may want to donate those stocks with gains on them, which would eliminate the gain that you need to pay tax on, and you can get the full donation tax credit for the full amount of the stock. So, lots of things to be thinking about. And it’s better to give yourself, say, a little bit of runway to be able to do that.
Greg Bonnell: You don’t want to go back to the university student days where you’re cramming it all in in one night before it’s all due in the morning. Given the fact that it has been a pretty challenging year, obviously, there’s long-term planning horizons around investments around your financial plan or on your tax plan. It’s been a volatile year. Maybe it’s rattled some people. Is it still important to step back and say, OK, you know, this has been a tough one, but longer term, what am I trying to achieve through all this?
Nicole Ewing: Well, we always say we want to have strategies that align with our goals. And we have short-term goals and we have long-term goals. And for many people, the long-term goals haven’t changed even though the last couple of years have been tough. We want to have that perspective of what is it that we’re doing and what impact that would have for the long run. So if, for example, instead of taking the money out of our TFSA, we took it out of our RSP, we’ve now lost that opportunity to contribute those funds in the future. We’ve lost all of that tax-sheltered growth that we would have had the opportunity to have. So certainly, we do want to be stepping back and looking at what is it that we’re trying to achieve, what’s most important to us, and what information do we need to make better decisions? Because this is complex stuff, and most people don’t have a fulsome idea of the Tax Act or what legislation might be coming down. So it’s great to really do your research and make sure that you understand what the fulsome implications of any decisions that you’re making.
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