If you have had any unprofitable investments or business losses over the past year, you are likely disappointed, but there could be a positive side. Tax-loss strategies, where you claim your capital losses to at least save money on your tax bill, can add a silver lining to the loss. In some cases, strategically taking on a loss could benefit you overall, too.

What Is Tax-Loss Selling?

Tax-loss selling can be a good plan of action when your non-registered investments drop in value. When you sell those investments at a loss, you can offset any capital gains, so you can reduce your taxable income and save on taxes. This means that although you may have lost money on the investment, you can turn it into a tax advantage to mitigate the loss. 

There are some rules and requirements that need to be followed, however, such as the superficial loss rule, and ensuring losses are assessed correctly. Also, a careful decision needs to be made on whether to use this strategy right away, or whether to carry forward your loss to a later year to maximize the benefits.   

Applying this method of tax income reduction properly can become complicated, but it is an effective way to make sure your non-registered investment losses aren’t wasted. By balancing out gains from other investments or reducing future income when investments are poor, this tactic can soften the impact and help prevent you from being penalized in the future when gains are up. Getting professional advice will help you get the most out of tax-loss selling.

Assessing Losses Over the Year

With tax-loss selling, you can offset any gains you had with your losses to reduce taxable income, but you need to apply the strategy correctly. Employing tax-loss selling strategies by year-end lets you strategize losses to avoid paying capital gains tax. If your losses equal your gains, you don’t owe capital gains tax. Losses can be carried back up to three years or carried forward indefinitely for future offsetting. 

Should You Carry Capital Losses Forward or Backward?

Net capital losses from the previous three years can be used to reduce your taxable capital gains. You can find your available amount on your notice of assessment or reassessment. 

This means you can benefit from tax savings at the optimal time. If you expect to be in the same tax bracket or a lower bracket in the future, carrying back capital losses may generate more tax savings. However, if you expect to be in a higher future tax bracket, you may want to carry capital losses forward, especially if you suspect you may sell securities in the future that will create a capital gain. 

Do Capital Loss Claims Affect Other Tax Areas?

Certain other tax strategies may be impacted by your loss-claiming strategy, but other taxation elements are not impacted.

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Income-Tested Benefits Aren’t Impacted

Applying past years’ capital losses or using them to offset gains won’t impact income-tested benefits like Old Age Security (OAS) or child benefits, because these losses are considered after calculating net income. However, your current year’s losses do directly reduce taxable gains, influencing benefits related to net income. Capital losses from other years won’t change this, but losses in the current year can. However, many pharmacists are high-income earners that generally don’t qualify for these, or only for reduced amounts.

How The Small Business Deduction Is Impacted If You Also Have Passive Income

It’s important to note that losses from previous years won’t help with Small Business Deductions (SBD) if your pharmacy or holding company earns passive income. 

As passive income increases, the Small Business Deduction (SBD) decreases. Passive income sources like interest, rental income from pharmacy space, or dividends impact this deduction. For example, if your pharmacy or holding company earns both business income and additional passive income from renting a community space, the SBD can lower the corporate tax rate on active business income but the passive income can claw back the SBD. Although a capital loss can offset gains, it doesn’t affect the SBD calculation.

Impacts to a Capital Loss Claim

Superficial Losses

It’s important to note that if your losses are classified as superficial, you can’t claim them or use them to offset capital gains. A concept known as identical property comes into play, too.  If you have realized a loss, you can’t buy an identical property for 30 calendar days before and after the settlement date of the sale, and can’t continue to own the identical property 30 calendar days afterwards. 

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For example, if you buy 1000 shares of pharmaceutical stocks for $10 per share and a total cost is $10,000, if you then sell those shares for $7 per share to free up cash for an unexpected need for cash flow for your pharmacy business, you will have a loss of $3,000. If you then buy back shares from the same company within 30 days before or after selling them, the loss could be deemed superficial, and you can’t use this amount to offset any capital gains.

Mitigate Financial Impacts

Claiming a capital loss is a good way of mitigating the negative impacts of an otherwise unprofitable situation, helping you save money on taxes. However, there is a complex interplay with other elements of a tax strategy, and there are complicated rules. Consulting with professionals, and carefully assessing all potential areas for capital gains losses will help

Pharma Tax can help you navigate these requirements, and assess your overall tax strategy, to see if this is a good option for you. We help many pharmacists pay significantly less tax every year, with proven strategies and tailored plans.

Ricardo Ardiles
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