Would it be wise to take capital gains in this situation?

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SilentPoet71
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Would it be wise to take capital gains in this situation?

Post by SilentPoet71 »

Hello,

I would appreciate any advice someone could give me. I am a buy and hold investor of Canadian dividend stocks (with a backbone of index investments) in my non-registered account. I am trying to build a portfolio for my retirement years (20+years away). Unfortunately, early in my investing life I was 'green with experience' and generated some significant capital losses in the amount $11,000 :( . These losses go back about 8 years. I was planning to use these losses against my capital gains when I retire.

I am starting to believe my strategy of waiting to use my capital losses to offset my capital gains so many years from now is a bad idea - in part due to the effects of inflation. But I am not sure if this right thinking.

My question is, should I sell some of my Canadian dividend stocks now, generate the capital gain and then offset this with my capital losses? I would then reinvest the funds as per my investment statement.

Thank you to anyone who could point me in the right direction. Cheers.
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Re: Would it be wise to take capital gains in this situation?

Post by AltaRed »

I would take an in-between approach. Use whatever capital losses you have to offset any cap gains you might receive in any given tax year. Index investments often have some cap gains on the T3 tax slip. Simply use enough cap losses to offset those gains each year until they are used up.

While it is true these capital losses may have some future value IF you are in a higher marginal tax bracket at a later date many years from now, you already acknowledge they will be eroded by inflation, but additionally the present value of those future losses deteriorates as well...especially when you really don't know what decade/year you will be using them.

I'd only save them if you know you will have a significant cap gain that will be realized in the not too distant future, e.g. sale of a rental property, or swapping of one index product for another product because you want too, not just because you have the cap losses available. IOW, don't let the tax tail wag the dog.
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Re: Would it be wise to take capital gains in this situation?

Post by kcowan »

Rolling forward capital losses only helps if you move into a higher tax bracket. You have 2 offsetting factors:
1. The role of inflation and
2. The possibility of a reduced CG exemption.

If it were me, I would take them now. A bird in the hand!
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DavidR
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Re: Would it be wise to take capital gains in this situation?

Post by DavidR »

SilentPoet71 wrote: 02 Nov 2017 14:56 ....My question is, should I sell some of my Canadian dividend stocks now, generate the capital gain and then offset this with my capital losses? I would then reinvest the funds as per my investment statement.
If you are invested in Canadian index funds, you will likely be allocated some capital gains from time to time by the funds. (Look for them on the annual T3 slips). It might be nice to have the capital losses available to use against such capital gains, which can be unexpected and which you have no control over..rather than creating gains immediately by selling investments.
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Re: Would it be wise to take capital gains in this situation?

Post by adrian2 »

DavidR wrote: 02 Nov 2017 17:43
SilentPoet71 wrote: 02 Nov 2017 14:56 ....My question is, should I sell some of my Canadian dividend stocks now, generate the capital gain and then offset this with my capital losses? I would then reinvest the funds as per my investment statement.
If you are invested in Canadian index funds, you will likely be allocated some capital gains from time to time by the funds. (Look for them on the annual T3 slips). It might be nice to have the capital losses available to use against such capital gains, which can be unexpected and which you have no control over..rather than creating gains immediately by selling investments.
+1!

We had a similar discussion in the past, and I've strongly argued that it makes zero sense to intentionally take capital gains which serve no other purpose than "burning" capital losses you're carrying forward.

The inflation argument isn't changing my mind at all: yes, it's (very) slowly depreciating, but even a slightly lower future value is better than burning your asset for no immediate benefit.
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Re: Would it be wise to take capital gains in this situation?

Post by adrian2 »

kcowan wrote: 02 Nov 2017 17:37 Rolling forward capital losses only helps if you move into a higher tax bracket. You have 2 offsetting factors:
1. The role of inflation and
2. The possibility of a reduced CG exemption.

If it were me, I would take them now. A bird in the hand!
Take them now if you have capital gains to neutralize. Do not create capital gains just for sake of "using" the past losses!
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Re: Would it be wise to take capital gains in this situation?

Post by AltaRed »

adrian2 wrote: 02 Nov 2017 18:50 Take them now if you have capital gains to neutralize. Do not create capital gains just for sake of "using" the past losses!
:thumbsup: Agreed.
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Re: Would it be wise to take capital gains in this situation?

Post by beachcomber »

Well, as a long time hedger of investments I would suggest you generate some 'tax free' capital gains this year to burn off half the capital losses you are presently holding. Hang on to the remainder of your losses to mitigate any surprise capital gains in the future which may move you to a higher tax bracket - particularly if you hold equity mutual funds. But consider repeating the process every year 'til capital losses have been exhausted.
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Re: Would it be wise to take capital gains in this situation?

Post by adrian2 »

beachcomber wrote: 02 Nov 2017 20:01 Well, as a long time hedger of investments I would suggest you generate some 'tax free' capital gains this year to burn off half the capital losses you are presently holding. Hang on to the remainder of your losses to mitigate any surprise capital gains in the future which may move you to a higher tax bracket - particularly if you hold equity mutual funds. But consider repeating the process every year 'til capital losses have been exhausted.
Are you going to spend the proceeds of the 'tax free' capital gains this year? If yes, then I'll agree with the strategy.
OTOH, if you're going to reinvest the proceeds, I have strong objections to it.
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Re: Would it be wise to take capital gains in this situation?

Post by twa2w »

Or take some gains and use the losses to offset, if you feel your portfolio is such that you need to rebalance some of your holdings.
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Re: Would it be wise to take capital gains in this situation?

Post by SilentPoet71 »

Thanks for the sage advice. As I am in the accumulation phase I rebalance my portfolio with the addition of new funds periodically throughout the year. My concern was I was not utilizing my capital gains and losses efficiently. As such, I will only use my capital loss to 'neutralize' any capital gains. Again, I appreciate the advice given here and have learned invaluable information as a DIY investor.
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Re: Would it be wise to take capital gains in this situation?

Post by SQRT »

adrian2 wrote: 02 Nov 2017 18:50
Take them now if you have capital gains to neutralize. Do not create capital gains just for sake of "using" the past losses!
Agree as well.
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Re: Would it be wise to take capital gains in this situation?

Post by gsp_ »

adrian2 wrote: 02 Nov 2017 18:48
DavidR wrote: 02 Nov 2017 17:43
SilentPoet71 wrote: 02 Nov 2017 14:56 ....My question is, should I sell some of my Canadian dividend stocks now, generate the capital gain and then offset this with my capital losses? I would then reinvest the funds as per my investment statement.
If you are invested in Canadian index funds, you will likely be allocated some capital gains from time to time by the funds. (Look for them on the annual T3 slips). It might be nice to have the capital losses available to use against such capital gains, which can be unexpected and which you have no control over..rather than creating gains immediately by selling investments.
+1!

We had a similar discussion in the past, and I've strongly argued that it makes zero sense to intentionally take capital gains which serve no other purpose than "burning" capital losses you're carrying forward.

The inflation argument isn't changing my mind at all: yes, it's (very) slowly depreciating, but even a slightly lower future value is better than burning your asset for no immediate benefit.
:thumbsup: Deferral of future CG taxes takes precedence over inflation.
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