Turn investing losses to profits

Many people are holding stocks or mutual funds that have declined in value since they were bought. Now is the time to consider whether to sell some of your holdings to lock in losses. These can then be claimed as deductions.

When you’re looking over your list, remember that capital losses can only be used to offset taxable capital gains. You can’t claim them against other income.

Carry losses back
But, and this is especially important this year, you can carry losses back as far as three tax years if you have no gains in 2001, or if the losses exceed this year’s gains.

That rule can save you a lot of money if you had to pay tax on capital gains at any time from 1998 to 2000.

The reason is this-you paid tax during those years at a much higher rate. The inclusion rate was greater (75 per cent in ’98 and ’99), as were the general tax rates.

To give you an idea of how things have changed, the effective tax rate on capital gains for a top-bracket Ontario taxpayer in 1998 was 37.72 per cent. In 1999, it dropped slightly to 36.57 per cent.

Falling tax rates
In 2000, it took a big fall to the 30 per centange, thanks to two cuts in the inclusion rate, which then took it down to 50 per cent by year-end.

This year the effective rate on capital gains is 23.2 per cent, and that’s only for those with over $100,000 in taxable income.

The story in other provinces is the same, although the numbers will vary. The highest capital gains rate anywhere in Canada is in Newfoundland. Someone in the top bracket in that province will pay 24.32 per cent.

Next page: Sell losers only

Sell losers only
So your strategy should be clear. If you had taxable capital gains in any of the three previous years and have unrealized losses in your portfolio, don’t crystallize any capital gains in 2001. Sell losers only.

This allows you to carry back the losses to years when the tax rates were higher. So you’ll get more money back than if you write off the losses against current-year gains.

The procedure for doing this is somewhat complicated. But it could save you hundreds of dollars-if you had large gains in previous years.

Make adjustments
You have to calculate an “adjustment factor” to determine how much of your 2001 loss can be applied to the year for which you are claiming. This adjustment factor will increase your 2001 capital loss to bring it into line.

For example:

  • If the inclusion rate for the year for which you’re making a claim was 75 per cent, your 2001 loss will be grossed up by 50 per cent.

So for every $1,000 in capital losses in 2001, you can claim $1,500 against 1998 and 1999. (2000 is more complex.)

Details in guide
You’ll find details in the capital gains tax guide. This can be downloaded from the Canada Customs and Revenue (CCRA) web site:

There are a few basic steps you need to consider:

  • You cannot claim backdated capital losses on your regular tax return.
  • You have to complete form T1A, Request for Loss Carryback.

It is not in the general tax package, but can also be downloaded from the CCRA site.

Sell before Dec. 31st
But remember, you have to sell your losers before December 31 to qualify. And that doesn’t mean you can call your broker on the last day of 2001.

In stocks, the settlement date is what counts, and that comes three business days after the trade is executed.

So get everything taken care of by Christmas Eve. Then sit back and wait for the tax refund in the spring.

Reprinted from the Internet Wealth Builder.