Tag: Tax Planning

Tax-loss harvesting, also known as tax-loss selling, is a powerful strategy that can enhance the tax efficiency of your investment gains. This strategy involves selling underperforming investments and realizing a capital loss that can then be used to offset capital gains from other investments.

As a brief refresher:

• Capital gains are triggered when you sell an investment for more than the price you purchased it for (profit).
• Capital gains are triggered when you sell an investment for less than the price you purchased it for (loss).
• Capital gains are included in your annual taxable income and taxed at your marginal tax rate. For individuals, the inclusion rate is 50% for capital gains up to $250,000 and 66.6% for the remaining amount above this threshold.

While the idea of intentionally selling a losing investment may seem counterintuitive, this can be a smart way to reduce your tax liability or in other words, the amount of taxes you owe.

Tax-Loss Harvesting Example

Suppose you purchase 100 shares of XYZ at $10-per-share, for a total of $1,000. Over time, the price of XYZ falls to $6-per share, and your 100 shares are now worth $600. You choose to sell all XYZ shares for $600 and realize a loss of $400 on your initial investment. This loss is considered a capital loss and can be applied against any capital gains realized in the same tax year, thus reducing your total taxable capital gains.

Say you also realize $2,000 in capital gains in that same tax year. Your $400 loss can be used to offset part of those gains. After netting the capital gains and losses, you would pay taxes on $800 of your earnings at the 50% inclusion rate for capital gains ($2,000 – $400 = $1,600 * 50%).

Had you not used tax-loss harvesting, you would report $2,000 in capital gains and pay taxes on $1,000 (50% of $2,000). In this example, you are reducing your reported capital gains by 20% using tax-loss harvesting.

Key Considerations

The above example provides a simplified illustration of tax-loss harvesting. In reality, most investors hold diversified portfolios with investments across account types, asset classes and sectors that require regular rebalancing and are subject to different tax treatments. This interplay can make tax-loss harvesting even more nuanced. Several other considerations should be kept in mind when tax-loss harvesting.

1. Eligible Investments

Tax-loss harvesting only applies to realized capital gains and losses in non-registered accounts. Losses within registered accounts, such as RRSPs and TFSAs, cannot be used for tax purposes, as gains and losses within these accounts are not taxed until withdrawals are made. In other words, capital losses in registered accounts cannot offset capital gains in non-registered accounts.

Alternative and private investments, such as private equity or private real estate, may also benefit from tax-loss harvesting, though challenges like liquidity, valuation, transaction costs, lock-up periods and differing tax treatments must be carefully considered.

2. Superficial Loss Rule

The Superficial Loss Rule prohibits you from claiming a tax deduction on a capital loss if you repurchase the same or identical investment within 30 days before or after the sale.

The Superficial Loss Rule is an important consideration when tax-loss harvesting, but with careful planning, you can sidestep it using strategies such as waiting 31 days before repurchasing the same investment or buying a similar but not identical investment.

3. Carry-Back & Carry-Forward Rules

Capital losses can be carried back three years or forward indefinitely to offset capital gains in those years.

For example, if you realize a capital loss in 2024, you could carry that loss back to offset any capital gains from 2021, 2022 or 2023 by filing a T1 Adjustment Request. If the loss isn’t used in the current year or carried back, it can be carried forward to offset capital gains in future years.

Final Thoughts

Tax-loss harvesting is often associated with year-end tax planning, as investors try to reduce their tax liability for the current year. However, it can be done throughout the year, especially if there are market fluctuations that create opportunities for harvesting losses. It’s important to work with an experienced financial professional like a Rothenberg Wealth Management Advisor to assess whether you can benefit from tax-loss harvesting and how you can implement this strategy to maximize your portfolio’s tax efficiency and reduce the amount of taxes owed.

Are you interested in tax-loss harvesting? Contact us by using the form below.

Online tax software is budget-friendly and time-efficient, but depending on the complexity of your situation, hiring a tax professional may be preferable.

The official deadline to file your Canadian personal income tax return for 2020 and pay any taxes owed to the Canada Revenue Agency (CRA) is April 30, 2021.   For Quebecers only: You can file your return up to May 30, 2021 and you will not be penalized. You can read more about this here.

Tax season is here, yet again. If you’re a tax filing veteran, you’re likely comfortable filing your tax return yourself, without any help. There’s satisfaction in doing it yourself and as it turns out, you might even enjoy it.

Canadians still love their tax refunds, but with an increasing number of people missing refunds due to costly mistakes, you might be torn over whether you should go the do-it-yourself route or if now is the time to employ the services of a tax expert.

An error on your tax return can lead to a penalty, interest charges or even an audit by the CRA. Perhaps most importantly, however, you may miss out on valuable tax deductions or credits.

Continue reading to learn how to decide whether tax software will do the job, or you require professional help.

When To Do Your Taxes Yourself

Preparing your own tax return should be easy if your financial situation is simple. We’ll call these people Tax DIYers, where DIY stands for “Do-It-Yourself!”

TurboTax and other off-the-shelf tax preparation software options will walk you through a series of questions about your finances and alert you to any credits and deductions you may qualify for. They don’t require any math calculations or in-depth knowledge of the tax code.

But how do you determine if your position is simple?

1. If preparing your taxes just requires you to pull information from a handful of documents prepared by others, such as the T4, you’ll find basic tax software suitable.
2. If your tax situation hasn’t changed over the last year, you work for an employer, are single with no kids, etc., your tax return would be very straightforward.
3. If nothing is going on in your life that can complicate your tax situation, it might not be worth paying a professional.

When to Hire a Professional

You might be better off hiring an accountant than trying to do your tax return yourself in some situations.

Tax preparers stay up to date on tax codes as well as provincial and federal tax laws.

An accountant can recommend what deductions and exemptions you qualify for and help you plan for future growth by informing you about any tax requirements changes.

Hire a tax expert in case of:

1. Major Life Changes

If you recently got married (congratulations), you might need a professional to guide you on the tax filing status to use. While most couples prefer filing jointly, there are some situations where it makes more sense to file separately.

It’s not just marriage. Other life milestones like expanding your family and having a child, losing or getting a new job, graduating from college and relocating could all impact your tax return and your potential total refund.

An accountant can help you learn about any new benefits or tactics to minimize your tax liability. This way, you will be able to take advantage of every tax break available to you.

A tax professional can also help you learn to navigate your tax return this year, so you feel confident doing it yourself in the future. You can always revert to doing your own taxes if you don’t experience any other major life changes the next year.

2. Failing to Pay in the Past

If you failed to file necessary tax returns in the past years, reach out to a tax expert.

They know about the programs offered by the CRA for individuals in this situation. A tax accountant can help you file years’ worth of returns, something that might take you a long time to master, especially as the April 30 tax filing deadline approaches.

This gives you confidence that your tax return is filed correctly and the peace of mind that you’re in good standing with the CRA.

3. Owning a Business

If you are a business owner, you should probably consider hiring an accountant to prepare your tax return.

Almost every financial transaction comes with some kind of tax consequence. Your accountant will prevent you from making any costly mistakes, help you report tax items accurately, and maximize deductions.

You should also use a tax preparer if you purchased rental property during the year.

4. Simply Not Having the Time

Tax preparation involves gathering documents, reviewing the procedures, and filling out tax forms. It is a notoriously slow and boring process, which is why so many of us dread it and postpone it until the last minute.

While doing this might seem like a simple weekend project for some Canadians, for others, not so much. Maybe you feel that the time you’d spend doing your taxes would be better spent elsewhere.

Consider hiring a tax expert if you lack the time or patience to prepare your own return.

In Conclusion

There is no universally correct answer when it comes to filing your taxes with software versus hiring an accountant or tax professional. Ultimately, the choice comes down to the complexity of your tax situation.

If your tax situation is fairly straightforward and you have some confidence in your ability to work step-by-step through tax software, it’s relatively cheaper to do your own taxes this way.

If your tax situation is more complicated, hiring a tax preparer can be worth the expense.

Just ensure the preparer has the right credentials and stellar testimonials to avoid being a victim of tax scams.

Over to You…

Irrespective of whether you file your own tax return or hire someone else to do it, have your return in by April 30.

Tax season can be stressful, but it can also be an exciting time for your wallet.

The official deadline to file your Canadian personal income tax return for 2020 and pay any taxes owed to the Canada Revenue Agency (CRA) is April 30, 2021.   For Quebecers only: You can file your return up to May 30, 2021 and you will not be penalized. You can read more about this here.

There are a string of tax deductions and credits you may qualify for that when applied can reduce or eliminate the amount of tax you owe. This means less money going to the taxman and more money in your pocket.

You may also end up being one of the millions of people receiving a tax refund, that is, a direct payout from the government, with the average amount per return reported at $1,858.

A tax professional will know which deductions and credits you are eligible for. In the case you’ve decided to forego any help altogether and brave the tax system yourself, continue reading to find out the most common tax deductions and credits you or your family may be eligible for.

Note that unlike the basic personal amount, which is automatically applied when you file online, you will most likely have to manually enter the amounts to receive the deductions and credits listed.

On that note, let’s dig in…

1. [NEW] Home Office Expenses for Employees

Type: Deduction

The form required for this is Form T2200 or T2200s. Quebec residents require a TP-64.3-V.

Did you work from home during 2020 due to COVID-19? Chances are, yes. If so, you may be able to claim certain out-of-pocket expenses related to your job on your tax return, provided you have not been reimbursed already by your employer. You can calculate your home office expenses by using the CRA’s online calculator.

The CRA also offers a temporary flat rate method as an alternative to simplify your claim. But the maximum amount you can claim with this method is $400, which may not cover all your expenses. More information on this flat rate can be found here on the CRA website.

2. Age Amount

Type: non-refundable tax credit

You may be entitled to the age amount tax credit if you are 65 years of age or older at the end of the taxation year. If your income is less than $38,508, you are eligible to receive the full age amount deduction of $7,637.

The higher your income, the less you will receive. If your income is higher than $89,421 for 2020, then you are not eligible for the age income amount deduction.

3. Pension income amount

You may be able to claim up to $2,000 if you report eligible pension or annuity payments on your tax return. Income from your Registered Retirement Income Fund (RRIF) qualifies for the $2,000 pension income amount.

For a detailed list of eligible pension and annuity income, click here if you’re 65 or younger and click here if you’re 65 years or older.

4. Medical expenses

Type: non-refundable tax credit

Through taxes, you are paying for medical services, but there are many medical expenses that you’ll have to pay out-of-pocket. Tally up receipt totals for the medical expenses made over the 12-month period ending in 2020, which you have not been reimbursed for. You may be able to claim eligible medical expenses up to $2,397 or 3% of your net income, whichever is less, to count toward a credit.

One of the most common medical expenses you can claim is prescription medication and dental services that are not for cosmetic purposes. You can also claim medical expenses for your spouse, common-law partner, your children, or other dependents.

5. [NEW] Digital news subscription

Type: non-refundable tax credit

You can get a digital news subscription for a year as low as the cost of a sandwich, but it can also set you back $100 or more per year. If you are an avid news consumer and have multiple subscriptions, the costs can add up.

Luckily for you, this is the first tax year you will be able to claim any expenses up to $500 that you paid over the past 12 months for a digital news subscription.

The only caveat is that the subscription needs to have been purchased from a qualified Canadian journalism organization, or QCJO. Qualifying digital news subscriptions include The Globe and Mail and the Toronto Star Newspapers. Here is a full, up-to-date list of qualifying digital news subscriptions.

 6. Foreign tax credit

Type: non-refundable tax credit

You are required to complete Form T2209.

You may have money abroad that is generating income, which is the likely case of persons such as expats and international students. This income you will have to report on your tax return, but you may be able to claim this credit depending on tax treaties. For more information, view the CRA website.

7. Disability tax credit (DTC)

Type: non-refundable tax credit

You must fill out and have the CRA approve Form T2201 if you are applying for the DTC for the first time.

Although you may not consider yourself as disabled, if you have significant health problems that affects your daily life, you may be eligible to receive financial relief in the form of the disability tax credit (DTC). Hundreds of thousands of individuals claim DTC each year, with the government distributing over $1.3 billion dollars in relief.

For 2020, you will be able to claim up to $8,416 should you qualify. First, you must meet the CRA criteria of disability and receive an attestation from a medical professional.

Thousands of medical conditions fall under the scope of DTC. You can find out if you’re eligible for the DTC here.

8. [NEW] Canada caregiver credit (CCC)

Type: non-refundable tax credit

Those caring for a dependent with a physical or mental impairment may be able to claim up to a maximum of $7,276. To learn more about this, view the CRA website here.

9. Tuition, education, and textbook amounts

Type: non-refundable tax credit

You must have received Form T2202, TL11A, TL11C, or TL11D from your educational institution.

It’s no secret that education is costly. Thankfully, you may be able to write off costs related to your education, such as tuition fees or textbook costs, on your tax return.

The amount you are eligible to claim depends on the amount set by your province or territory. Unfortunately, the federal education and textbook tax credits were eliminated back in 2017.

10. Registered Retirement Savings Plan (RRSP)

Did you contribute in 2020 to your RRSP? If so, you can deduct the total amount contributed from your taxable income. You can read more about RRSPs here.

In Conclusion…

Claiming deductions and credits is one of the best ways to reduce the total amount that you’ll pay in taxes. When you reduce your taxable income, you lower your effective tax rate. You may also enjoy a sizeable payout from the government, otherwise known as a tax refund. To keep more money in your pockets, you’ll want to claim as many deductions and credits as possible.