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How Can Tax Loss Harvesting Help Your Investment Portfolio?

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Tax loss harvesting is a new term that might sound strange to ordinary people in Canada. Nevertheless, it’s simple and straightforward if you understand a few guidelines. The year 2022 is a perfect year for recovering losses as the market is fluctuating and volatile. So let us understand what tax loss harvesting really is. When selling underperforming assets for less than you purchased them for in order to generate a tax loss that can offset realized capital gains in any area of your portfolio, Harvesting tax losses is a common component of portfolio management and typically happens when wealth managers rearrange the asset weightings in their clients’ portfolios. 

What is tax loss harvesting?

Non registered account

A capital loss occurs when you sell an investment, such as a stock or a bond, for less than its Adjusted Cost Base (ACB) while it is held in a non-registered account. The ACB is essentially the investment’s purchase price (book value), plus any additional acquisition charges like commissions or legal fees. Within a non-registered account, a capital gain may be offset by a capital loss.

Tax-loss harvesting is the practice described here. It provides an immense degree of versatility. Capital gains from the current tax year may be offset by current capital losses. Capital losses may also be carried forward indefinitely or back to three previous years. It could allow investors to reduce their tax burden.

Strategies 

1. Restructuring a Portfolio

You can restructure a portfolio by using this strategy. Restructuring a portfolio can be done through tax loss harvesting. You need to pay close attention to the cost basis, which will adjust the initial purchase price. The benefit of doing that is that it will make it easier to calculate capital losses or gains on each individual asset. 

2. Superficial Loss/ wash sale rule 

Another important strategy to keep in mind is that the Canada Revenue Agency (CRA) follows superficial loss criteria while using tax loss harvesting. So it is important to follow those guidelines. This important law prohibits investors from repurchasing the same investment within 30 days after selling it if they are claiming a capital loss. For instance, the Canada Revenue Agency (CRA) superficial loss criterion will apply if you sell the capital property at a loss and then repurchase the identical assets within 30 days after the sale. This statement simply means you can’t subtract capital losses from your yearly income. CRA developed this system to stop investors from abusing it to reduce their income obligations. 

3. Your investment strategy

The third strategy is your investment strategy. The kind of investment will influence how simple or difficult it is to harvest tax losses. Tax-loss harvesting may be easier to implement in a portfolio composed of individual equities or exchange-traded funds. Investing just in mutual funds might be more difficult since mutual funds may pay yearly capital gain distributions whether or not investors continue to retain fund units. This yearly capital gains distribution requires investors to pay Canadian capital gains tax on half of the total amount.

What are the benefits of tax loss harvesting?

There are several factors to consider when dealing with capital gains and losses on your taxable investment accounts. Below are some ways to reduce the tax-loss selling benefits:

1. Reduce your tax liability in non-registered investment accounts.

2. reduces the unfavorable impact of losses within your portfolio.

3. To optimize your asset mix, combine it with portfolio rebalancing.

4. can be utilized wisely to save money on taxes in the future.

5. Consider talking with a tax professional before executing your tax-loss harvesting technique if you aren’t taking a hands-off approach.

Summary 

In this blog, we have learned that the year 2022 is a perfect year for recovering losses as the market was fluctuating and volatile. A capital loss occurs when you sell an investment, such as a stock or a bond for less than its adjusted cost base (ACB) while it is held in a non-registered account. Capital gains from the current tax year may be offset by current capital losses. Capital losses may also be carried forward indefinitely or back three previous years. Tax loss harvesting is a new term that might sound strange to ordinary people in Canada, nevertheless, it’s actually simple and straightforward if you understand a few guidelines.

Another important strategy to keep in mind is that the Canada Revenue Agency (CRA) follows superficial loss criteria while using tax loss harvesting. For instance, if you sell the capital property at a loss then repurchase the same investment within 30 days after selling it if you are claiming a capital loss. Mutual funds pay yearly capital gains distributions which require investors to pay Canadian capital gains tax on half of the total amount.

Salman Rundhawa
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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