My good friend Steve is about as aggressive an investor as you’ll find. “Steve, why are you putting so much of your money at risk?” I asked him. “Tim, I know that money can’t buy me happiness, but I’d much rather cry in a mansion on a lake than in a small condo somewhere.” That’s Steve for you.
As it turns out, Steve has some opportunities to save meaningful tax dollars around his portfolio before year-end. We talked about some ideas. Today, let’s look at year-end tax planning for investors.
1. Claim capital losses against the right gains.
You’re probably aware that taxes on some realized capital gains were increased as of June 25, 2024, although the enabling legislation has not yet been passed by Parliament. Specifically, the portion of capital gains subject to tax increased from one- half to two-thirds for personal capital gains in excess of $250,000 annually, and for all capital gains realized in a corporation or trust. Any capital losses carried forward from prior years will be worth more if you apply those losses against capital gains subject to the new inclusion rate. Now, capital losses realized in 2024 have to be applied against any capital gains in 2024 if possible (excess losses can be carried forward), but capital losses carried forward from 2023 or earlier years can be applied against any future capital gains. So, if you realized capital gains this year that will be taxed at the lower one-half inclusion rate you may be best to hold onto your capital losses carried forward to apply them against gains taxed at the higher inclusion rate in the future. This is particularly true if you expect to have some capital gains in the next couple of years.
2. Sell losers before year-end.
If you realized capital gains this year that will be taxed at the higher two-thirds inclusion rate, you should see if there are any securities that have declined in value and consider selling these before year-end to offset the capital gains. Any capital losses realized in 2024 that can’t be used to offset gains this year can be carried forward indefinitely to offset capital gains in the future, or can be carried back to 2023, 2022 or 2021 to offset gains in those years. Carrying losses back could recover some taxes paid in those years, but the savings won’t be as great as using the losses against capital gains taxed at the higher inclusion rate in the future. If you’re selling a loser, the settlement date must fall in 2024, which means placing your trade on or before Monday, Dec. 30 (for publicly traded securities that settle one day after the trade – which became the norm on May 27, 2024).
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3. Think about currency exchange.
If you’re planning on selling an investment denominated in a foreign currency, your capital gain or loss could be different than you expect after taking currency exchange into account. In Steve’s case, he purchased 10,000 shares of a U.S. stock in June, 2021, when the price was US$20 per share. One U.S. dollar at that time equalled about $1.20 Canadian, so Steve’s adjusted cost base (ACB) in Canadian dollars is $24 per share ($20 X 1.20). Today, the share price has fallen to US$18, so Steve wants to sell to realize a capital loss in 2024. In U.S. dollars, his capital loss is $2 per share ($20 minus $18). But since the exchange rate today is about $1.38 Canadian for each U.S. dollar, Steve will receive proceeds on the sale of each share of $24.84 Canadian ($18 x 1.38). Did you catch that? Steve’s proceeds will be $24.84 per share, but his ACB is just $24 per share. He has a capital gain when calculated in Canadian dollars. In his case, selling the shares today will realize a capital gain of $0.84 per share, or $8,400 for all 10,000 shares. This will cost him about $3,000 in taxes given that he’s in the highest tax bracket in Ontario and has other capital gains this year. He wasn’t expecting this.
4. Realize gains if your income is low.
Do you expect to have a higher income next year and beyond? Perhaps you’ve been on maternity or paternity leave, you’ve been out of work for part of the year, or you expect to be paid more in the future. If so, you might be best to realize some capital gains this year when you’re in a lower tax bracket and will face less tax than you will in the future.
5. Pay investment expenses before year-end.
To claim a deduction for certain investment-related expenses for 2024, make sure you pay the amounts before year-end. I’m thinking specifically of investment counsel fees, custody fees, costs to maintain your portfolio accounting records, and most interest on funds borrowed for investment purposes.
Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author, and co-founder and CEO of Our Family Office Inc. He can be reached at tim@ourfamilyoffice.ca.
