11/24/2023 0 Comments Image2icon alternative![]() ![]() There is a way to use your investment losses in your favour if you get the timing right, but you’ll need to be cautious about the implementation. If you own shares in a company that have increased in value, this is called a capital gain. This type of investment income is preferentially taxed. (This assumes the investment is not held in a registered account, like an RRSP or TFSA.) That is, you pay tax on only 50 per cent of the gain. You bought shares in a Canadian company for $10,000 and they grew in value to $15,000. If you continue to hold the shares, this is called an unrealized capital gain and no income tax is owing to CRA (Canada Revenue Agency). Taxes are due only when you sell the investment, and it becomes a realized capital gain. ![]() If you sold the holding, then $5,000 would need to be reported on your tax return that year. No taxes are withheld at source (like a paycheque). Instead, you must pay the taxes owing by April 30 of the next year, after you file your tax return. In this instance, $5,000 is the capital gain for 2021. ![]() But, because capital gains are tax-preferred, only $2,500 is considered by CRA to be a taxable capital gain and the other half is tax-free. The corollary is that if your shares have decreased in value, then you have a capital loss. Although it may be unfortunate to have lost money, you can use the capital loss to your benefit. The income tax rules allow you to offset any capital gains with capital losses before calculating the taxes that are due. Similar to gains, only 50 per cent of the loss can be used to offset the gain. In my example, let’s assume you had other investments that have cumulatively decreased by $4,000. This is called an unrealized capital loss as long as you continue to hold the shares. But, if you sold the holdings at a decreased value, then you will have a realized capital loss of $4,0. Again, only half of the loss ($2,000, in this case) is reportable. This amount offsets your gain, leaving only $500 to be included on your tax return ($2,500 taxable gain minus $2,000 capital loss equals $500 of investment income you are required to report on your tax return). That’s a lot better than the original $5,000 tax bill you thought you would have. ![]()
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