If you're like many investors and have some losers in your portfolio, do your best to make lemonade out of those lemons with the following tips on dealing with capital losses.
Trigger a loss to offset gains.
If you realized capital gains this year, or in the past three years, consider selling some of your losers. Those capital losses can offset the capital gains to save you tax. The losses must first be applied against gains in the current year to the extent possible. If the losses are carried back to a prior year, use Form T1A when filing your 2004 return.
Claim a loss on a defunct security.
If you're holding shares that no longer trade on the market, you can elect to claim the loss without selling those shares provided the company is bankrupt or insolvent and no longer carries on business. Otherwise, you'll have to sell those shares to claim the loss. In this case, selling those shares to a parent, child, or sibling can do the trick. Talk to a tax pro for more.
Trigger a loss and make a donation.
If you're thinking of donating to charity, consider selling one or more of your losers and donating the cash. This will provide you with a donation credit over and above the capital loss, and will help charity too. You can also donate the securities directly to charity and claim your regular allowable capital loss in addition to a donation credit for the fair market value of the securities, but the charity will appreciate the cash more.
Claim an ABIL to offset other income.
You may be able to claim an allowable business investment loss (ABIL) where you've invested in the shares of, or lent money to, a small business corporation, and you've incurred a loss. The loss can result from selling the investment to an arm's-length person at a loss, or the company has simply become bankrupt or insolvent.
An ABIL equals 50 per cent of your investment, and can be applied against any type of income, not just capital gains. By the way, losses on Tier 3 stocks on the TSX Venture Exchange generally qualify for ABIL treatment (see my article dated July 6, 2002, at http://www.timcestnick.com).
Wait at least 30 days to reacquire a security.
If you sell an investment at a loss, the loss can be denied as a "superficial loss" if you acquire the same investment within a certain time frame. That time frame is 30 days prior to and 30 days following the date of the sale (a 61-day window). To avoid the problem, wait until that 61-day window has passed, or buy a similar, but not the same, security.
Close out option contracts with losses.
If you close out option contracts with accrued capital losses before year end, you can utilize those losses to offset realized capital gains this year, or in 2001, 2002, or 2003.
Tim Cestnick is managing director, Tax and Estate Planning, at AIC Ltd.
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