One Important Tax Tip For Investors During The Holiday Season

Here’s how Barrick Gold Corp. (TSX:ABX) (NYSE:ABX), BlackBerry Ltd. (TSX:BB) (NASDAQ:BBRY), and Canadian Natural Resources Ltd. (TSX:CNQ) (NYSE:CNQ) can help us understand a critical investment strategy for the holiday season.

The Motley Fool

Here at The Motley Fool, we advocate buy-and-hold investing. However, there are occasions when the portfolio needs to be adjusted, and this is the time of year to start thinking about some of those moves.

Let’s take a look at one strategy Canadian investors can use to reduce the taxes they have to pay on their big winners for 2014.

Tax-loss selling

It’s beginning to feel a lot like… season.

Well, that’s not exactly how the song goes but for Canadian investors who took the opportunity to lock in some big gains this year in their non-registered accounts, it’s important to think about selling your duds to minimize your tax hit.

Here’s how it works. When you sell an investment such as a stock or fund that has dropped in value, you trigger a capital loss. That loss can be used to reduce any capital gains you have realized on the sale of equities that increased.

A capital loss can also be used to offset gains in any of the preceding three years, or carried forward indefinitely, but only after the loss is applied against the gains in the current year.

Ideally, you would never sell a stock for a loss, but most investors have one or two companies in their portfolios that just haven’t performed as expected.

One catch with tax-loss selling is that you can’t repurchase the same shares for at least 30 days. A way to partly get around this would be to buy an exchange traded fund (ETF) for the same industry.

For example, if you bought Barrick Gold Corporation (TSX: ABX) (NYSE: ABX) when it was much higher and want to sell it to apply the loss against some gains for the year, you could immediately reinvest the proceeds in a gold miner ETF that holds Barrick and the other large gold producers. If Barrick makes a big move higher in the month after you sell the shares, the ETF would likely move also, as long as the price gain is industry-related. Be careful about trying this with like-for-like ETFs. The CRA won’t let you do it.

Another way to trigger a tax loss is to gift your shares to your children. For example, you might have bought BlackBerry Ltd. (TSX: BB) (NYSE: BBRY) back when it was a superstar stock, but now want to solidify some losses to compensate for a big gain in Canadian Natural Resources Ltd. (TSX: CNQ) (NYSE: CNQ) that you locked in during the summer.

You can gift the BlackBerry shares to your kids. This way, you get to use the loss to reduce your taxable capital gains, and your children get to enjoy the rewards if BlackBerry manages to succeed in its turnaround efforts.

In order to have a loss qualify for 2014, the settlement date has to be December 31, or earlier. That means the last trade date to trigger a tax loss in 2014 will be December 24.

Investors have been reminded this year that stocks can be volatile, and some income investors have seen sharp drops in their favourite dividend stocks. If you are interested in dividend-growth and capital appreciation but don’t like the risks tied to commodity markets, take a look at the free report discussed below about one top Canadian stock.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Walker owns shares of Barrick Gold Corp.

More on Investing

calculate and analyze stock

Prediction: My 2 Top TSX Stocks to Beat the Market in 2024 and Beyond

Any investment is a prediction on the future of stock. Here are two stocks that should deliver predictably strong returns…

Read more »

Retirees sip their morning coffee outside.

Here’s the Average RRSP Balance at Age 71 in Canada

If you hold stocks like Fortis Inc (TSX:FTS) in an RRSP, you pay no dividend and capital gain tax until…

Read more »

Dividend Stocks

2 REITs to Buy to Earn Like a Lazy Landlord

Becoming a landlord and managing the property yourself may give you the most direct exposure, but it also comes with…

Read more »

money cash dividends
Dividend Stocks

Beat the TSX Immediately With This Cash-Gushing Dividend Stock

This dividend stock has already beat the TSX today, even from 52-week lows. But it could only be the beginning.

Read more »

question marks written reminders tickets
Tech Stocks

Nvidia’s Historic Stock Split: Will Investors See Bigger Gains?

Nvidia's (NASDAQ:NVDA) record 10:1 stock split entices many investors in several important ways. But some myths aren't technically correct.

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog

Retirees: 2 TSX Dividend Stocks That Have Raised Payouts Annually for Decades

These stocks offer high yields and should continue to raise their payouts.

Read more »

TFSA and coins

5 Canadian Stocks With a Real Chance of Tripling Your TFSA’s Value

TFSA balances can triple in value with five Canadian stocks that have delivered outsized gains in recent years.

Read more »

A worker drinks out of a mug in an office.
Tech Stocks

Want $1 Million in Retirement? 3 Stocks to Buy Now and Hold for Decades

Growth stocks such as Docebo and Celsius Holdings should help you generate outsized gains in the upcoming decade.

Read more »