2022 has been a tough year for equity markets, and as the year comes to a close, some may wonder if there's a tax planning silver lining. The answer? It depends. For corporate investment accounts the general tax planning rules do not apply.
Crowe MacKay's tax advisors review tax-loss selling for corporate investment accounts and how its impact can be beneficial or detrimental depending on your organization's situation. If you require assistance, connect with us in Alberta, British Columbia, Northwest Territories, or the Yukon.
Tax-loss Selling
Tax-loss selling, sometimes referred to as tax-loss harvesting, is a tax planning strategy. The strategy involves selling investments with accrued losses to offset realized capital gains, ultimately reducing taxes owed at year-end. The current year capital losses are first applied to reduce any gains in the year. Excess capital losses can be carried back to any of the three preceding years or carried forward indefinitely.
Will Tax-loss Selling Lower My Tax Payable?
To understand if tax-loss selling will lower your tax payable, we need to start by reviewing the taxation of capital gains for Canadian Controlled Private Companies. The table below shows a corporation reporting a $100,000 capital gain. The capital gain's inclusion rate is 50%. This means that 50% of the gain is included in taxable income, and the other 50% is non-taxable. Tax is payable on the taxable capital gain and is placed into two buckets: a 10% non-refundable tax and a 15.3% refundable tax.Refundable Tax
Non-Taxable Gain
| Capital Gain | Taxable Capital Gain | Non-refundable Tax | Refundable Tax | Capital Dividend Account |
| 100% | 50% | 10% | 15.3% | 50% |
| $100,000 | $50,000 | $10,000 | $15,300 | $50,000 |
Case Study: The Story of Two Friends
HYD Co.
Joey is the shareholder of HYD Co. Joey is busy working on his acting career, and HYD Co. does no year-end tax planning.
Bing Co.
Chandler is the shareholder of Bing Co. Chandler, a proactive self-starter, reads an article about tax-loss selling. Chandler sees how tax-loss selling could apply to Bing Co and triggers $100,000 of realized capital losses before the fiscal year end.
For the purpose of this example, each successful entrepreneur:
- Realizes a $100,000 capital gain during the year;
- Holds $100,000 of unrealized losses in their marketable securities portfolio; and
- Is drawing the after-tax proceeds of the $100,000 gain for personal use.
| HYD Co. | Bing Co. | |
| Strategy | Do nothing | Tax loss selling |
| Capital Gain [A] | 100,000 | 100,000 |
| Taxable Capital Gain | 50,000 |
50,000 |
| Tax-loss Selling | 0 | (50,000) |
| Corporate Income | 50,000 | 0 |
| Corporate Tax | (25,300) | 0 |
| Dividend Refund | 15,300 | 0 |
| Corporate Tax Payable [B] | (10,000) | 0 |
| Capital Dividend Account | 50,000 | 0 |
| Available for Distribution | 90,000 | 100,000 |
| Taxable Dividend to Individual | 40,000 | 100,000 |
| Personal Tax Payable* [C] | (19,560) | (48,900) |
| Net Cash to Individual [A] +[B]+[C] | 70,440 | 51,100 |
*The top marginal personal tax rate on non-eligible dividends in BC in 2022 is 48.9%
In this example, tax-loss selling resulted in $19,340 (~19%) of additional taxes compared to doing nothing. Seller beware.
For corporate investment accounts, the general rules with respect to year-end tax-loss selling do not apply. Taxpayers should review their individual situations with a trusted tax advisor to ensure they maximize their tax opportunities.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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