The Motley Fool

How to Save on Taxes During a Market Crash

Image source: Getty Images

Losses from stocks or any other capital assets are inevitable during a market crash. The sad thing is that the said losses are capital losses. It won’t decrease your income from other sources except only when you die. However, if you experience a loss in the current tax year, know the ways to recover the loss in some way.

Timely reporting

In case of a net capital loss in 2020, for example, you can carry it back to 2019, 2018, and 2017. Use it to reduce your taxable capital gains and choose where to apply them in any of three years. Since the amount of losses can be significant, don’t hesitate to report them.

In order to apply a 2020 net capital loss to any of the previous years, complete Section III – net capital loss for carryback on Form T1A, Request for Loss Carryback. You don’t need to file an amended income tax and benefit return for the chosen year. Also, be sure the request is before the end of the current calendar year.

The 10 Best Stocks to Buy This Month

Click here to learn more!

Be tax-efficient

Whether a bull or bear market, it’s a must to be tax-efficient. During the working years, you’re likely to be in the higher tax brackets. To defer or reduce the income tax due, make contributions to the Registered Retirement Savings Plan (RRSP) during this period.

A blue-chip stock like Royal Bank of Canada (TSX:RY)(NYSE:RY) is ideal for the RRSP. This largest banking institution in Canada pays a high 4.83% dividend. You’ll defer paying income tax while your money grows.

Come retirement, when you’re in a lower income tax bracket, you’ll be paying lower taxes on your RRSP withdrawal.

Last Friday the 13, RBC made a resounding rally. The bank stock jumped 14.9% to lead advancers a day after the biggest TSX plunge happened. The Canadian government is moving tirelessly to stave off the ill-effects of the epidemic, boosted investor confidence.

Finance Minister Bill Morneau assures the investing public the country will use its fiscal strength to ensure the economy stays healthy. In the face of any uncertainty, RBC is a safe asset to own.

While you’re in the higher tax bracket, the practical recourse is to place your money in a Tax-Free Savings Account (TFSA). This time, you’re not just saving tax but paying zero taxes. A Dividend Aristocrat like BCE (TSX:BCE)(NYSE:BCE) is a tax-free option.

Your TFSA balance can grow faster with the telecom giant’s 5.82% dividend. Assuming you have an available contribution room of $17,500, the $1,018.50 dividend earnings are tax-free. If you withdraw the entire amount of $18,518.50 after one year, no tax is due on the money.

BCE also displayed resiliency on March 13, 2020. The stock climbed 11.78% to $55.82. Analysts are predicting a further capital gain of 23.6% in the next 12 months. The latest buzz about BCE is its commitment to donate an additional $150 million to support mental health and wellness services in Canada.

Don’t freeze

Rather than freeze and absorb the losses in a market crash, however, know the steps to recover them and still save on taxes. Make an effort to visit the CRA website for proper guidance.

The 10 Best Stocks to Buy This Month

Renowned Canadian investor Iain Butler just named 10 stocks for Canadians to buy TODAY. So if you’re tired of reading about other people getting rich in the stock market, this might be a good day for you.

Because Motley Fool Canada is offering a full 65% off the list price of their top stock-picking service, plus a complete membership fee back guarantee on what you pay for the service. Simply click here to discover how you can take advantage of this.

Click Here to Learn More Today!

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 Christopher Liew has no position in any of the stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.