ME: “Is there a mandatory waiting period between selling a stock (with the sole intention of locking in the loss) and then buying it back (if it’s a stock you have long-term faith in)? Know what I mean? Is there a minimum waiting period as far as CRA is concerned?”
ACCOUNTANT: “Yes, there is a minimum waiting period. If a security is sold and then repurchased within 30 days, CRA considers any loss to be “superficial”. Superficial losses cannot be claimed and are, instead, added to the cost base of the security.
Keep in mind that losses on selling securities are, almost always, considered a capital loss. A capital loss cannot be used to offset other sources of income. It can only be used to offset other capital gains. If you have no capital gains in the year of the loss, you may carry forward the capital loss until you do. Capital losses do not expire.”
And then I started thinkin… “All good, but what if you sell and 30 days later the stock or fund is way higher? How to determine if it’s likely to do that?” Depends how much you’ve lost relative to what your tax savings are. So…
At a Marginal Tax Rate of 40%:
- A $1,000 investment that locks in a loss at $900 will save you $20 in tax. (A $100 loss at an MTR of 40% generates a capital gains tax savings of $20. (Only 50% of capital gains are taxable.))
- A $1,000 that locks in at $800 saves $40 in tax.
- …at $700, $60.
- …at $600, $80.
- …at $500, $100.
So how much risk of appreciation is there in the 30-day window where you don’t own the stock you want?
- $20 is 2.2% of $900. Is it likely that your investment could rebound more than 2.2% in 30 days? If so, then the tax savings aren’t worth it, because your cost to re-buy the stock 30 days after selling will be more than $920.
- …5% in 30 days?
- …8.6% in 30 days?
- …13% in 30 days?
- …20% in 30 days?
With markets as volatile as they are right now, seems like all of the above are possible. Regardless, the locking in the losses idea only seems low-risk if you’ve lost a significant amount (based on your cost).
Of course, if you’re dumping a crappy investment that you have no intention of buying back in the new year, then I don’t see any reason NOT to dump it and get the tax credit.
