Capital loss carry forward

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Capital loss carry forward

Post by gaspr »

Say that I did some tax loss harvesting in 2016 and ended the year with a total loss of $20000 of which 50% is taxable for a carry forward amount of ($10000). I assume that if the inclusion rate changes to a higher rate in the future, that one does not get to go back and adjust the amount of the loss carried forward? And if that is true, does it make some sense to harvest some gains now to "use up" that loss before any rate change occurs?
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Re: Capital loss carry forward

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gaspr wrote: 04 May 2017 17:29 Say that I did some tax loss harvesting in 2016 and ended the year with a total loss of $20000 of which 50% is taxable for a carry forward amount of ($10000). I assume that if the inclusion rate changes to a higher rate in the future, that one does not get to go back and adjust the amount of the loss carried forward? And if that is true, does it make some sense to harvest some gains now to "use up" that loss before any rate change occurs?
Usually, the tax calculations are adapted for taking into account the year of the loss, to keep the system fair. As an example, look at the rules for applying losses after 1989 and before 2000 in this CRA document: http://www.cra-arc.gc.ca/tx/ndvdls/tpcs ... f-eng.html

The bigger problem of carrying losses forward is that the inflation-adjusted value of the loss erodes with time. It is, in general, a bad idea to let losses carry forward; it is better to immediately realize offsetting gains (keeping tax down to $0), when possible. Of course, this could be invalidated by a change in future inclusion rate. Take your bet! :wink:
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Re: Capital loss carry forward

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Also see http://www.taxtips.ca/filing/capitallosses.htm for how historical inclusion rates have been handled.
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Re: Capital loss carry forward

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Thank you!
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Re: Capital loss carry forward

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longinvest wrote: 04 May 2017 18:01 The bigger problem of carrying losses forward is that the inflation-adjusted value of the loss erodes with time. It is, in general, a bad idea to let losses carry forward; it is better to immediately realize offsetting gains (keeping tax down to $0), when possible. Of course, this could be invalidated by a change in future inclusion rate. Take your bet! :wink:
I have a reasonably sized loss dating back to the days when my parents managed an account for me. It just so happens though that my RRSP/TFSA room grew faster than my income so I've had years and years without non-reg capital gains and the loss has just kept being carried forward.

However at my current income and savings rate, in a year or two I'll start needing that non-reg account again. :)
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Re: Capital loss carry forward

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longinvest wrote: 04 May 2017 18:01 The bigger problem of carrying losses forward is that the inflation-adjusted value of the loss erodes with time. It is, in general, a bad idea to let losses carry forward; it is better to immediately realize offsetting gains (keeping tax down to $0), when possible.
To me, only if it makes sense to crystallize gains, e.g. an outsized position. Taking gains just to offset a current year loss doesn't make sense. What can make sense depending on one's MTR in a particular prior year is to carryback a loss to offset gains in one of the previous 3 tax years with a T1-ADJ.
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Re: Capital loss carry forward

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longinvest wrote: 04 May 2017 18:01 The bigger problem of carrying losses forward is that the inflation-adjusted value of the loss erodes with time. It is, in general, a bad idea to let losses carry forward; it is better to immediately realize offsetting gains (keeping tax down to $0), when possible.
I respectfully disagree. I would not recommend realizing offsetting gains just for the sake of neutralizing the loss and not carrying it forward. Of course, it's different when you have another reason to sell/switch a winning position.
longinvest wrote: 04 May 2017 18:01 Of course, this could be invalidated by a change in future inclusion rate. Take your bet! :wink:
So far, whenever the inclusion rate has changed, past capital losses have been adjusted in a fair manner.
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Re: Capital loss carry forward

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queerasmoi wrote: 06 May 2017 13:53 I have a reasonably sized loss dating back to the days when my parents managed an account for me. It just so happens though that my RRSP/TFSA room grew faster than my income so I've had years and years without non-reg capital gains and the loss has just kept being carried forward.
ISTM that the (slowly eroding) loss in question morally belongs to your parents. Not saying you should pass back the benefit when you will have offsetting gains (I'm pretty sure they won't accept anything), just saying that it's their "property" being eroded by inflation.
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Re: Capital loss carry forward

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adrian2 wrote: 06 May 2017 16:25
longinvest wrote: 04 May 2017 18:01 The bigger problem of carrying losses forward is that the inflation-adjusted value of the loss erodes with time. It is, in general, a bad idea to let losses carry forward; it is better to immediately realize offsetting gains (keeping tax down to $0), when possible.
I respectfully disagree. I would not recommend realizing offsetting gains just for the sake of neutralizing the loss and not carrying it forward. Of course, it's different when you have another reason to sell/switch a winning position.

What if I were to sell all my position In VCN and then immediately purchase ZCN with the proceeds? This would be more than enough of a capital gain to offset the loss. Meets the CRA requirements re superficial losses, and only costs me two trades.
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Re: Capital loss carry forward

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gaspr wrote: 06 May 2017 17:28
adrian2 wrote: 06 May 2017 16:25
longinvest wrote: 04 May 2017 18:01 The bigger problem of carrying losses forward is that the inflation-adjusted value of the loss erodes with time. It is, in general, a bad idea to let losses carry forward; it is better to immediately realize offsetting gains (keeping tax down to $0), when possible.
I respectfully disagree. I would not recommend realizing offsetting gains just for the sake of neutralizing the loss and not carrying it forward. Of course, it's different when you have another reason to sell/switch a winning position.
What if I were to sell all my position In VCN and then immediately purchase ZCN with the proceeds? This would be more than enough of a capital gain to offset the loss. Meets the CRA requirements re superficial losses, and only costs me two trades.
Again, I think it's a bad idea.

If the inclusion rate increases, carry forward capital losses will likely be increased from their original values.
I see absolutely no reason to "burn" any losses with "artificial" gains just in order to avoid the carry forward.
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Re: Capital loss carry forward

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If I had a gain from one of the past three years, and it was a year with a higher than normal marginal rate, then it might make sense? But in my actual case, that is not an option.
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Re: Capital loss carry forward

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gaspr wrote: 06 May 2017 17:59 If I had a gain from one of the past three years, and it was a year with a higher than normal marginal rate, then it might make sense?
If you had a gain in the past 3 years it would make perfect sense to carry back; I think we all agree on that.
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Re: Capital loss carry forward

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So if the loss carried forward is eroding to inflation, then so is any unrealized capital gain. And at the exact same rate so the argument re inflation is not a valid one. Am I getting this right?
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Re: Capital loss carry forward

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gaspr wrote: 06 May 2017 18:07 So if the loss carried forward is eroding to inflation, then so is any unrealized capital gain. And at the exact same rate so the argument re inflation is not a valid one. Am I getting this right?
No, you're not.

If tax brackets were not indexed to inflation, it would make no difference. But, as they are indexed to inflation, one is better to offset gains as early as possible. Offsetting gains going back three years with losses experienced this year is best. Offsetting gains in the future with losses experienced this year is worse.

Does it make a big difference, in a 2% inflation world? It depends how long the losses are carried. If one waits 25 years, it's a loss of almost 40% in value.

OK, look at it this way:
  1. Would you rather pay $10 in taxes today, or $10 in taxes in 25 years?
  2. Would you rather get a $10 tax rebate today, or a $10 tax rebate in 25 years?
(Answers: a) in 25 years b) today)
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Re: Capital loss carry forward

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FWIW, I've rarely had a carryforward loss, the primary exception being 2008/2009 when I purposely crystallized losses and I think it took until 2013 to use them up completely. Could not pass on the opportunity. Five years is neither here nor there.
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Re: Capital loss carry forward

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It's no surprise that the CRA limits us to carry losses back no more than 3 years, but allows us to indefinitely carry them forward. It also allows us to indefinitely carry forward RRSP deductions.
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Re: Capital loss carry forward

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adrian2 wrote: 06 May 2017 16:25
longinvest wrote: 04 May 2017 18:01 The bigger problem of carrying losses forward is that the inflation-adjusted value of the loss erodes with time. It is, in general, a bad idea to let losses carry forward; it is better to immediately realize offsetting gains (keeping tax down to $0), when possible.
I respectfully disagree. I would not recommend realizing offsetting gains just for the sake of neutralizing the loss and not carrying it forward. Of course, it's different when you have another reason to sell/switch a winning position.
I agree with adrian2

I have always been slow on the trigger for my winners. For this reason, I frequently have positions in excess of 5% of total portfolio. Whenever I sell a loser, I tend to sell one of my outsized winners to take immediate advantage of doing this without any tax consequences. The proceeds of both sales are lumped together and used to initiate a new position and hence increase diversification.

One other advantage of coinciding a CG with a Capital loss in the same year is that the Capital loss will permit you to not lose some of the income tested benefits (OAS, family allowance...) This advantage is lost if the loss is carried forward.
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Re: Capital loss carry forward

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Except cap losses in any given year must first be used to offset cap gains in the current year, so that decision is already made for the current year. All one can do is trigger yet more cap gains to use up more of the cap losses and why do that if you would not otherwise crystallize the gains?
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Re: Capital loss carry forward

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gaspr wrote: 06 May 2017 17:28 What if I were to sell all my position In VCN and then immediately purchase ZCN with the proceeds? This would be more than enough of a capital gain to offset the loss. Meets the CRA requirements re superficial losses, and only costs me two trades.
If you were selling VCN for a gain you would be free to repurchase it right away - you wouldn't have to buy ZCN instead (you have a gain not a superficial loss). You would presumably be increasing your ACB of VCN though (and reducing its future capital gains).
I did this last year to take gains to offset a loss and then gift the proceeds, but I don't think you will find people recommending you do this just for the sake of offsetting the loss if your intent is holding long term.
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Re: Capital loss carry forward

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OnlyMyOpinion wrote: 06 May 2017 19:56
gaspr wrote: 06 May 2017 17:28 What if I were to sell all my position In VCN and then immediately purchase ZCN with the proceeds? This would be more than enough of a capital gain to offset the loss. Meets the CRA requirements re superficial losses, and only costs me two trades.
If you were selling VCN for a gain you would be free to repurchase it right away - you wouldn't have to buy ZCN instead (you have a gain not a superficial loss). You would be increasing your ACB of VCN though (and presumably reducing its future capital gains).
I did this last year to take gains to offset a loss and then gift the full proceeds, but I don't think you will find people recommending you do this just for the sake of offsetting the loss if your intent is holding long term.
Ah yes. Good point.
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Re: Capital loss carry forward

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longinvest wrote: 06 May 2017 18:33
gaspr wrote: 06 May 2017 18:07 So if the loss carried forward is eroding to inflation, then so is any unrealized capital gain. And at the exact same rate so the argument re inflation is not a valid one. Am I getting this right?
No, you're not.

If tax brackets were not indexed to inflation, it would make no difference. But, as they are indexed to inflation, one is better to offset gains as early as possible. Offsetting gains going back three years with losses experienced this year is best. Offsetting gains in the future with losses experienced this year is worse.

Does it make a big difference, in a 2% inflation world? It depends how long the losses are carried. If one waits 25 years, it's a loss of almost 40% in value.

OK, look at it this way:
  1. Would you rather pay $10 in taxes today, or $10 in taxes in 25 years?
  2. Would you rather get a $10 tax rebate today, or a $10 tax rebate in 25 years?
(Answers: a) in 25 years b) today)
Sorry if I am being a little slow here but....

Say I currently have a $20k loss carried forward. I also have a $20k unrealized gain. Both values erode to inflation. Why would it matter when the offsetting gain is realized as it would have zero effect on income?
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Re: Capital loss carry forward

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gaspr wrote: 06 May 2017 20:19 Sorry if I am being a little slow here but....

Say I currently have a $20k loss carried forward. I also have a $20k unrealized gain. Both values erode to inflation. Why would it matter when the offsetting gain is realized as it would have zero effect on income?
OK, I might be wrong. Paying $0 today or in 25 years is identical. Right. So, all that remains is to speculate on whether the inclusion rate might increase or decrease in the future. If one thinks that an increase is more likely than a decrease, one would prefer to trigger the offsetting gain early.

A lazy investor who does not try to speculate on future tax changes would not artificially trigger offsetting gains. Adrian wins. (Time to fix my IPS :? ).
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Re: Capital loss carry forward

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AltaRed wrote: 06 May 2017 19:52 Except cap losses in any given year must first be used to offset cap gains in the current year, so that decision is already made for the current year. All one can do is trigger yet more cap gains to use up more of the cap losses and why do that if you would not otherwise crystallize the gains?
I am saying that I have a reason to crystallize a capital gain. The reason is to reduce a overweight position. You will add that the tax tail should not wag the investment dog. I am saying that I do not mind (too much) letting a position drift up to 8-9% (as an example...) but if I can bring it down without tax issues (since I have a capital loss in that year), I will bring it down.

The bonus is that triggering the CG in that year (rather than a future year and carrying forward the Capital loss) is that the CG trigger will not (in my case) reduce my family allowance.
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Re: Capital loss carry forward

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Sounds logical to me. I tend to play with crystallizing tax losses to time them appropriately. For instance, I decided to rotate some reset prefs in 2016 as they were climbing to grab the tax losses before they diminished in value. Now I have some losses to play with, maybe to offset some gains this year if/when I dump ALA (after they close that ill fated acquisition in the USA).
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Re: Capital loss carry forward

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longinvest wrote: 06 May 2017 20:34 OK, I might be wrong. Paying $0 today or in 25 years is identical. Right. So, all that remains is to speculate on whether the inclusion rate might increase or decrease in the future. If one thinks that an increase is more likely than a decrease, one would prefer to trigger the offsetting gain early.

A lazy investor who does not try to speculate on future tax changes would not artificially trigger offsetting gains. Adrian wins. (Time to fix my IPS :? ).
I still think that changing the CG inclusion rate is a red herring. In the past, whenever such changes have occurred, existing (carry-forward) capital losses have been adjusted in a fair manner. Why would you think this would not be the case in the future?
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