Tax Managed Strategy 1
If you or your spouse¹ have realized capital gains in the last three years, consider selling an investment that has dropped in value to recover the taxes paid on those gains.
Stock market volatility may cause investors to worry about their investments. Many want to take action and reorganize their portfolios, even if they’re in a loss position. Once the decision is made to crystallize losses, our capitalizing on capital losses strategy can be used to gain maximum tax benefit on portfolio losses. This strategy is based on carrying back any losses that exceed current year capital gains to a previous year with net capital gains.
An in-depth look at the issue ... and the opportunities
The Income Tax Act (Canada) requires capital losses to first be applied against capital gains realized in the current year. If there’s any remaining balance, the net capital losses can be used to either reduce taxable capital gains in any of the three preceding years or in any future year.
The best strategy is to carry the losses back to the earliest year in which you have capital gains before it falls out of the three-year window. For example, the earliest date allowed to carry back 2021 losses is 2018.
Transferring capital losses between spouses
If you don’t have capital gains this year or the previous three years but your spouse does, it’s possible to transfer capital losses to your spouse.
First, the investment is sold to crystallize the capital loss. Immediately afterwards, your spouse buys the exact same amount of the identical investment. Your spouse then sells the investment after waiting at least 31 days. The capital loss realized on your sale will be denied under the superficial loss rules and added to your spouse’s adjusted cost base instead, thereby transferring the capital loss.
- are selling their investments at a loss and who have little or no capital gains in the current year
- had capital gains, or their spouse had capital gains, in the past three years
To apply for a loss carryback, investors need to:
- complete form T1A, Request for Loss Carryback
- attach the completed form T1A to this year’s income tax return.
Canada Revenue Agency (CRA) will then automatically apply the losses to the previous years requested on the form.
If you or your spouse repurchase property identical to that sold within the period that begins 30 days before and ends 30 days after the disposition, and still hold it on the 30th day after the disposition, then the capital loss on the original sale will be denied under the superficial loss rules. The denied loss is added to the adjusted cost base of the acquired property.
A trust version of a mutual fund isn’t identical to the corporate class version of the same mutual fund. Therefore, capital losses realized by the sale of a mutual fund trust won’t be denied under the superficial loss rules if the same fund is purchased in a mutual fund corporation, as you’re purchasing a different legal structure.
Investment options with Manulife Investment Management
Mutual funds can help meet your specific financial needs throughout your life. Whether you’re just starting out, accumulating wealth, or nearing/in retirement, mutual funds offered by Manulife Investment Management can offer you solutions to help build a portfolio that meets your needs. Manulife utilizes four principal asset management firms to oversee its extensive fund family. Each firm is recognized for its strength and depth of experience in various asset classes and investment styles. Manulife is committed to providing quality investment products and services so you can enjoy life and worry less.
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A guaranteed interest contract (GIC) offers competitive rates plus investment options that include basic, escalating rate, and laddered GIC accounts. Investors benefit from a guarantee on their principal investment and from several different investment options that can diversify and add flexibility to a portfolio. Manulife Investment Management GICs can be an ideal solution for conservative investors looking to help grow their wealth but who are also concerned about minimizing risk.
1 Includes a spouse or common-law partner as defined by the Income Tax Act (Canada).
Commissions, trailing commissions, management fees, and expenses all may be associated with mutual fund investments. Read the fund facts as well as the prospectus before investing.
Mutual funds aren’t guaranteed — their values change frequently and past performance may not be repeated. Any amount that is allocated to a segregated fund is invested at the risk of the contractholder and may increase or decrease in value.
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The Manufacturers Life Insurance Company is the issuer and guarantor of contracts containing Manulife segregated funds and the Manulife Investments Guaranteed Interest Contract (GIC). The commentary in this publication is for general information only and should not be considered investment or tax advice to any party. Individuals should seek the advice of professionals to ensure that any action taken with respect to this information is appropriate to their specific situation. Manulife, Manulife Investment Management, the Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.