Tax losses can save on OAS clawbacks

National Post


December is the month when investors are repeatedly reminded to review their investment portfolios to determine whether opportunities exist for tax loss selling.

Tax loss selling, an annual winter ritual, involves disposing of a stock, bond, mutual fund or other security in your non-registered account that is in an accrued loss position and that you no longer wish to own as part of your portfolio. In other words, what you’re looking for is a security whose fair market value is lower today than what you originally paid for it and therefore represents an accrued capital loss.

Since capital losses may only be used to offset other capital gains, you would typically only harvest a loss if you have other gains you realized in 2013, which also may include any capital gains distributions from mutual funds that you will be receiving in the next few weeks.

You may also decide to crystallize a capital loss if you want to recover taxes you paid on capital gains realized in any of the three prior calendar years (2012, 2011 or 2010). Although you must trigger that loss in 2013 for it to be available for the prior three years, you don’t get the taxes back until you file Canada Revenue Agency’s Form T1A “Request for Loss Carryback” as part of your 2013 tax filing next spring.

Any capital losses not used in 2013 nor carried back may be carried forward indefinitely to offset capital gains in future years. It is therefore worth noting that there is no point in rushing to sell a losing position in 2013 if you can’t use the loss this year or in a prior year unless you decide that you really no longer want to own that security as part of your portfolio.

We recently came across an interesting scenario where a client had more than enough capital losses carried forward from prior years to offset a large capital gain he realized in 2013 on the sale of a rental property. Yet we still advised him to go through his non-registered portfolio and trigger enough capital capital losses in 2013 to offset the gain on the sale of his property. Why?

The client, who was over 65 and an Old Age Security (OAS) recipient, had net income (absent the capital gain) of around $71,000, the threshold at which OAS begins to be “clawed back.” By triggering a capital loss in 2013, the client was able to eliminate his capital gain and thus keep his net income below the $71,000 OAS clawback threshold and avoid losing part of his OAS.

If, on the other hand, he had relied on using prior years’ capital loss carryforwards to eliminate his current year’s capital gain, while he wouldn’t have had to pay tax on that capital gain, he would have been subject to the OAS clawback since capital loss carryforwards are deducted against taxable income and don’t reduce net income for clawback purposes.