Strategies for tax loss selling
If your New Year’s resolution is to keep more of your investment dollars invested, there are four key tax-saving dates to mark on your 2024 calendar.
While tax savings are usually an afterthought, a good strategy can boost retirement savings by hundreds of thousands of dollars over a lifetime.
It can get complicated depending on your individual circumstances, so it might be best to discuss them with a qualified advisor or tax professional.
DECEMBER 27, 2023: TAX-LOSS SELLING DEADLINE
If you want to use 2023 stock market losses to recoup taxes on stock market gains going back three years or any year in the future, you must sell by Dec. 27 for the trade to settle before the clock strikes midnight on Dec. 31. The deadline to sell U.S. equities this year is also Dec. 27.
Because half of capital gains on equities sold in a non-registered trading account are taxed, half of capital losses can eliminate the taxes on capital gains dollar-for-dollar.
As with any tax strategy, the Canada Revenue Agency (CRA) has strict rules when it comes to tax-loss selling.
The most important is called the superficial loss rule, which prohibits the repurchase of the same stock within thirty days of the tax loss sale. The superficial loss rule applies to repurchases in any registered or non-registered account in the name of the account holder, and even the account holder’s spouse. If you want to repurchase the same stock you must wait at least 31 days from the sale.
That means you can not repurchased the same equity until February 1, 2024.
JANUARY 1, 2024: TFSA CONTRIBUTION LIMIT EXTENSION
One of the benefits of inflation is the $500 inflation-adjusted increase to the 2024 tax free savings account contribution limit. Canadians who have contributed the maximum amount to their TFSAs will be permitted to contribute another $7,000, instead of last year’s $6,500 limit.
If you withdrew money from your TFSA in 2023, that contribution space can also be reclaimed in the new year.
There is no contribution deadline for a TFSA. Allowable contribution space can be carried forward to future years for the vast majority of TFSA holders who don’t contribute the maximum amount.
Over-contributions can result in penalties from the Canada Revenue Agency (CRA), so it’s important to keep track.
The TFSA is an ideal investment vehicle because those contributions can be invested in just about anything, gains are never taxed, and you can withdraw funds at any time.
FEBRUARY 29, 2024: RRSP CONTRIBUTION DEADLINE
Registered Retirement Savings Plan contributions can also be invested and grow tax-free in just about anything, but if you want to deduct them from your 2023 taxable income, you must contribute by Feb. 29. The RRSP deadline is usually March 1, but 2024 is a leap year.
Tax savings are based on your personal marginal tax rate, so the more income you generated in 2023, the bigger the savings.
Canadians love to get those RRSP refunds in the spring, but it’s important to know RRSPs are fully taxed when they are withdrawn, ideally at a low tax rate in retirement.
If your income was low in 2023, a TFSA contribution could be a better option.
If you want to contribute to both your TFSA and RRSP, consider contributing to your RRSP before the deadline and putting the refund in your TFSA.
APRIL 30, 2024: INCOME TAX DEADLINE
It’s hard to avoid the April 30 deadline to file your income tax return but there are ways to steer tax dollars into your investment portfolio.
If you make an RRSP contribution before the February 29 deadline and want the refund by spring, don’t forget to deduct it from your taxable income when you file.
Also, don’t forget to include any other deductions or credits you or your spouse have accumulated throughout the year.
TFSA contributions are not tax deductible.
Be sure to include all income received during the year including capital, dividend or income gains from non-registered (not RRSP or TFSA) investment accounts.
This is also the time to use those capital losses you banked up before the end of 2023 against capital gains that year, the two previous years, or save them for future years.