Capital loss carry forward

Income tax policy, rules, problems, strategy and software. Property and consumption taxes too.
longinvest
Veteran Contributor
Veteran Contributor
Posts: 3954
Joined: 10 Sep 2012 17:26
Location: QC

Re: Capital loss carry forward

Post by longinvest »

adrian2 wrote: 06 May 2017 22:42 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?
Actually, I keep making the same mental mistake. Being able to trigger an offsetting capital gain today presupposes that there is currently a capital gain somewhere in the portfolio. So, whether this gains is realized today or at a later point, it can be offset by the (carried-over) loss. As long as a future change in inclusion rate is done in a fair manner, it changes nothing to realize the gain today or later (if offset by the loss): the net effect will remain $0 tax.
Variable Percentage Withdrawal (finiki.org/wiki/VPW) | One-Fund Portfolio (VBAL in all accounts)
User avatar
scomac
Veteran Contributor
Veteran Contributor
Posts: 7787
Joined: 19 Feb 2005 09:47
Location: The Gateway to Wine Country

Re: Capital loss carry forward

Post by scomac »

AltaRed wrote: 06 May 2017 21:13 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).
I crystalled a tax loss in 2016 by rotating out of reset rate prefs that were in a losing position along with a couple of ill timed buys. That has allowed me to sell off some bank shares at zero tax liability in 2017 as well as exit a very long term position in GPC.

It remains to be seen if these were astute moves or follies of speculation, but it is doubtful that I would have undertaken it with full tax burden. That said, there is value in eliminating an embedded tax liability even if the individual moves prove out to be unsuccessful from an investing perspective.
"On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?"
Thomas Babington Macaulay in 1830
User avatar
patriot1
Veteran Contributor
Veteran Contributor
Posts: 4880
Joined: 28 Feb 2005 03:53

Re: Capital loss carry forward

Post by patriot1 »

longinvest wrote: 07 May 2017 00:37 As long as a future change in inclusion rate is done in a fair manner, it changes nothing to realize the gain today or later (if offset by the loss): the net effect will remain $0 tax.
That's assuming you have the same marginal tax rate in both years. If not, you will get a higher benefit by using the loss carry forward in a high marginal rate year. Much like carrying forward deducting an RRSP contribution.
longinvest
Veteran Contributor
Veteran Contributor
Posts: 3954
Joined: 10 Sep 2012 17:26
Location: QC

Re: Capital loss carry forward

Post by longinvest »

Patriot,
patriot1 wrote: 07 May 2017 08:48
longinvest wrote: 07 May 2017 00:37 As long as a future change in inclusion rate is done in a fair manner, it changes nothing to realize the gain today or later (if offset by the loss): the net effect will remain $0 tax.
That's assuming you have the same marginal tax rate in both years. If not, you will get a higher benefit by using the loss carry forward in a high marginal rate year. Much like carrying forward deducting an RRSP contribution.
You're falling into the same intellectual trap that I was falling into. $0 tax is $0 tax, regardless of year, inclusion rate, or marginal tax rate.
Variable Percentage Withdrawal (finiki.org/wiki/VPW) | One-Fund Portfolio (VBAL in all accounts)
gaspr
Contributor
Contributor
Posts: 287
Joined: 10 Feb 2015 11:39

Re: Capital loss carry forward

Post by gaspr »

adrian2 wrote: 06 May 2017 22:42
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?
I agree that carry forward losses will very likely be treated the same as in the past. But, it is still an unknown. If I can zero out the loss by simply selling and then immediately re buying the exact amount needed of the same ETF, my only downside is the two commisions. Other than that, where is the harm?
User avatar
adrian2
Veteran Contributor
Veteran Contributor
Posts: 13331
Joined: 19 Feb 2005 08:42
Location: Greater Toronto Area

Re: Capital loss carry forward

Post by adrian2 »

gaspr wrote: 07 May 2017 10:39 If I can zero out the loss by simply selling and then immediately re buying the exact amount needed of the same ETF, my only downside is the two commisions. Other than that, where is the harm?
The harm is "burning" the loss on something you do not immediately need, vs. carrying it forward to be used when needed. E.g., to neutralize future CG distributions by mutual funds / ETFs (which you cannot control), stock events resulting in an unavoidable gain, or your own future decisions to rebalance / exit a winning position.

The carry forward loss is an ace (OK, maybe king/queen) in your pocket, it's not burning a hole there, keep it there for better use.
Imagefiniki, the Canadian financial wiki
“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
gaspr
Contributor
Contributor
Posts: 287
Joined: 10 Feb 2015 11:39

Re: Capital loss carry forward

Post by gaspr »

adrian2 wrote: 07 May 2017 10:47
gaspr wrote: 07 May 2017 10:39 If I can zero out the loss by simply selling and then immediately re buying the exact amount needed of the same ETF, my only downside is the two commisions. Other than that, where is the harm?
The harm is "burning" the loss on something you do not immediately need, vs. carrying it forward to be used when needed. E.g., to neutralize future CG distributions by mutual funds / ETFs (which you cannot control), stock events resulting in an unavoidable gain, or your own future decisions to rebalance / exit a winning position.

The carry forward loss is an ace (OK, maybe king/queen) in your pocket, it's not burning a hole there, keep it there for better use.
That makes sense. Thank you for helping me understand this.
queerasmoi
Veteran Contributor
Veteran Contributor
Posts: 3378
Joined: 27 May 2008 16:25

Re: Capital loss carry forward

Post by queerasmoi »

adrian2 wrote: 06 May 2017 16:28
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.
The whole account is property they invested for me and on my behalf, using my SIN (and including some of my long-ago Bar Mitzvah gift money), and transferred to my control about a decade ago. I've had plenty of gains to make up for the losses but they mostly happened in RRSP/TFSA.

Sure you could argue the property is eroding, but... is there any rational reason to leave assets out of tax shelters just to eat up past capital losses? I don't see a reason to. In which case it's an "asset" I have no way to realize anytime soon.
User avatar
adrian2
Veteran Contributor
Veteran Contributor
Posts: 13331
Joined: 19 Feb 2005 08:42
Location: Greater Toronto Area

Re: Capital loss carry forward

Post by adrian2 »

queerasmoi wrote: 07 May 2017 11:23 Sure you could argue the property is eroding, but... is there any rational reason to leave assets out of tax shelters just to eat up past capital losses? I don't see a reason to.
:thumbsup:
Imagefiniki, the Canadian financial wiki
“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
User avatar
patriot1
Veteran Contributor
Veteran Contributor
Posts: 4880
Joined: 28 Feb 2005 03:53

Re: Capital loss carry forward

Post by patriot1 »

longinvest wrote: 07 May 2017 08:51 You're falling into the same intellectual trap that I was falling into. $0 tax is $0 tax, regardless of year, inclusion rate, or marginal tax rate.
OK let's look at some numbers. Suppose you have a $10K capital loss carry forward (I mean the amount CRA shows after the inclusion rate). You have $20K of unrealized capital gains (after inclusion) and need to sell 1/2 this year and 1/2 next year.

Suppose you are in a low income year and know next year will be high income. You can use the loss carry forward this year and pay tax on $10K at next year's high rate, or use it next year and pay tax on $10K at this year's low rate.

As I said, much the same rationale as carrying forward RRSP deductions.
longinvest
Veteran Contributor
Veteran Contributor
Posts: 3954
Joined: 10 Sep 2012 17:26
Location: QC

Re: Capital loss carry forward

Post by longinvest »

Patriot,
patriot1 wrote: 07 May 2017 20:18
longinvest wrote: 07 May 2017 08:51 You're falling into the same intellectual trap that I was falling into. $0 tax is $0 tax, regardless of year, inclusion rate, or marginal tax rate.
OK let's look at some numbers. Suppose you have a $10K capital loss carry forward (I mean the amount CRA shows after the inclusion rate). You have $20K of unrealized capital gains (after inclusion) and need to sell 1/2 this year and 1/2 next year.

Suppose you are in a low income year and know next year will be high income. You can use the loss carry forward this year and pay tax on $10K at next year's high rate, or use it next year and pay tax on $10K at this year's low rate.

As I said, much the same rationale as carrying forward RRSP deductions.
You're addressing a different problem. The problem I was addressing was:
  • Is there an advantage to immediately realize an offsetting capital gain, when one experiences a capital loss?
I mistakenly thought that there was an advantage, as the value of the capital loss gets eroded by inflation over time. But, the thing is that the offsetting gain experiences the same erosion, resulting into no difference in taxes between realizing the offsetting gain today or waiting until future portfolio transactions (such as rebalancing) trigger capital gains which can be nullified using the carried forward loss. Waiting for "natural" offsetting gains is thus preferable.

You are addressing the problem of when one should realize taxable capital gains (with no offsetting losses). Obviously, one should prefer to experience them as late as possible. Maybe (?) sometimes it can be an idea to trigger them in low tax years, but this is not obvious (unless the tax is zero due to very low taxable income), because growth on the money paid in taxes is lost forever. (See Capital gains may be illusory for a discussion about it).
Variable Percentage Withdrawal (finiki.org/wiki/VPW) | One-Fund Portfolio (VBAL in all accounts)
Post Reply