Selling the losers in your stock portfolio can help save you tax

Nobody enjoys realizing they've lost money when they sell stocks. However, financial advisors suggest this is an opportune time to review your investment portfolio and identify any underperforming assets that could potentially lower your tax liability.

Kris Kibler, tax planning lead from Wealthsimple, explains that if you sell shares at a loss, that deficit can be used to offset gains from other successful investments, thereby reducing the total tax owed. For example, if you purchased shares for $10,000 and sold them for $7,000, the $3,000 loss could be subtracted from capital gains, thereby decreasing the amount of tax payable next year.

Kibler emphasizes that tax-loss selling should be balanced with the overall investment strategy, rather than serving as the sole focus.

It's crucial to remember that tax-loss selling is only applicable to taxable or non-registered accounts. Losses from accounts such as a Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), or Registered Education Savings Plan (RESP) cannot be used to offset taxable gains elsewhere. They can only be used to offset capital gains within the same type of account.

If you don't have any capital gains this year, your losses can be carried back three years or forward to future years. However, the Canadian Revenue Agency (CRA) does not allow so-called "superficial losses." This means you cannot claim a loss if you repurchase the same or identical security within 61 days of selling it, starting 30 days before the sale and ending 30 days after. This rule extends to your spouse, common-law partner, corporations you or your spouse control, or an affiliated person.

Julie Petrera, director of financial planning at Edward Jones, cautions that tax-loss selling is not an investment strategy to be implemented for short-term tax savings. It's a "silver lining" to offset losses, but should not dictate your long-term investment decisions. "While you have lost money on that security or investment, the money that you've lost could be made up for in tax savings applied to another investment," she advises.