Tax Loss Selling

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Over the last few weeks, the financial market has taken a downturn amidst fears over Coronavirus.

Understandably, you are concerned with your portfolio, it’s important to stay level-headed to avoid making financial missteps. However, staying level-headed doesn’t necessarily mean you sit there and do nothing. In fact, one consideration you can look is taking an active tax management approach.

Tax loss selling is a strategy to crystallize or realize any capital losses in your non-registered accounts so it can be used to offset any capital gains. There is no benefit to selling in your tax free savings account (TFSA) or registered retirement savings plan (RRSP).

You can apply capital losses back 3 years or carry them forward indefinitely, therefore we’ve outlined several situations that make sense for tax loss selling.

To better understand how tax-loss selling works, imagine a scenario in which someone invests $100,000, putting $50,000 in “Investment A” and $50,000 in “Investment B.”

At the end of one year, Investment A has risen by $10,000 and is now worth $60,000. Investment B has declined by $10,000 and is now worth $40,000.

Without tax-loss selling, the investor has a realized gain of $10,000 from Investment A, and has a potential tax bill of $1,500 (assuming he or she sells the shares and pays the 15% capital gains tax on the profit).

On the other hand, with tax-loss selling, selling Investment B to offset gains from Investment A. At the end of the year, instead of paying a $1,500 tax, the investor only has a potential tax bill of $0, for a potential tax savings of $1,500.

With the investor’s tax liability reduced by $1,500, that savings becomes money that can be invested back in the portfolio, used to maximize RRSP contributions, pay off debt, or spend as one pleases. 

What Situations make sense for tax loss selling?

  • If you have an investment with a considerable capital gain, review through your current investments to see if there are any investments to sell at a loss.

  • Receiving a tax refund for a previous year. Keep in mind, you can apply capital losses back 3 years, therefore if you sold a property within the last 3 years for a considerable gain and paid the tax. This year, you could sell other investments at a loss and apply them back and get some tax paid back.

  • For tax deferral, with tax losses you can apply these losses back 3 years or carry them forward indefinitely, therefore you may want to trigger a loss today because if you are planning to sell that property in the next year or so, it may rebound and therefore you will lose the chance to offset the gains.

  • Lastly, you may have an investment in your portfolio that’s a dud. It might be time to move on and put your money into a different investment so that you can apply the loss in the future.

Tax Loss Selling is Complicated

There are specific conditions required by CRA that must be met in order for this strategy to work such as making sure your loss is not declared a “superficial loss” (these rules are very restrictive). A superficial loss is when you sell and trigger a capital loss, you cannot deduct the loss if you or an affiliate purchase an identical security within 30 days before or after your settlement date.

Another condition is that the sale of assets is prior to the year-end deadline (this varies by calendar year). You also need to make sure you have accurate information on the adjusted cost base (ACB) of your investment. When you file your taxes, any losses must be first used to offset capital gains in the current tax year, then any remaining losses can be carried back.

Before engaging in tax loss selling, you should contact us directly so we can make the strategy works for you.

How to apply for EI benefits for COVID-19 quarantines and other support programs

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What are EI benefits for those quarantined with COVID-19?

Employment Insurance (EI) sickness benefits provide up to 15 weeks of income replacement and is available to eligible claimants who are unable to work because of illness, injury or quarantine, to allow them time to restore their health and return to work. Canadians quarantined can apply for Employment Insurance (EI) sickness benefits.

Is there a waiting period?

For quarantine because of COVID-19, the one week waiting period is waived. Contact the new dedicated toll-free phone number if you are in quarantine and seeking to waive the one-week EI sickness benefits waiting period so you can be paid for the first week of your claim:

  • Telephone: 1-833-381-2725 (toll-free)

  • Teletypewriter (TTY): 1-800-529-3742

What benefits does EI offer?

Employment Insurance (EI) sickness benefits can provide you with up to 15 weeks of financial assistance if you cannot work for medical reasons. You could receive 55% of your earnings up to a maximum of $573 a week.

Who qualifies for EI sick-leave benefits?

Employed Canadians who pay EI premiums and self-employed people registered for access to EI may be eligible for sickness benefits.

There are a number of factors that determine eligibility. You need to demonstrate that:

  • you’re unable to work for medical reasons

  • your regular weekly earnings from work have decreased by more than 40% for at least one week

  • you accumulated 600 insured hours* of work in the 52 weeks before the start of your claim or since the start of your last claim, whichever is shorter

*As an example, 600 hours are equivalent to 20 weeks of work at 30 hours a week.

While you’re receiving sickness benefits, you must remain available for work if it weren’t for your medical condition.

If you are self-employed and pay into EI, you have to wait at least 12 months from the date of your confirmed registration before you are eligible for sickness benefits. You must also meet all of the following conditions:

  • The amount of time you spend on your business has decreased by more than 40% for at least one week because of your medical condition

  • You earned a minimum amount of self-employed earnings during the calendar year before the year you apply for benefits. To receive benefits for 2020, you need to have earned at least $7,279 in 2019

What if I don’t qualify for EI?

In April, the government will be introducing the Emergency Care Benefit providing up to $900 bi-weekly, for up to 15 weeks. This flat-payment Benefit would be administered through the Canada Revenue Agency (CRA) and provide income support to:

  • Workers, including the self-employed, who are quarantined or sick with COVID-19 but do not qualify for EI sickness benefits.

  • Workers, including the self-employed, who are taking care of a family member who is sick with COVID-19, such as an elderly parent, but do not qualify for EI sickness benefits.

  • Parents with children who require care or supervision due to school or daycare closures, and are unable to earn employment income, irrespective of whether they qualify for EI or not.

Application for the Benefit will be available in April 2020, and require Canadians to attest that they meet the eligibility requirements. They will need to re-attest every two weeks to reconfirm their eligibility. Canadians will select one of three channels to apply for the Benefit:

  1. by accessing it on their CRA MyAccount secure portal;

  2. by accessing it from their secure My Service Canada Account; or

  3. by calling a toll free number equipped with an automated application process.

Do you need a Doctor’s note?

According to the Government of Canada’s website, people claiming EI sickness benefits due to quarantine will not have to provide a medical certificate.

How do I get started with the application for EI to see if I qualify?

The application for Employment Insurance can be found here:

Apply for EI Benefits