Tax-loss Selling: Can Your Corporate Investment Account Benefit?

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.

Dave Gautier reviews 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

The refundable tax is refunded to the corporation when a taxable dividend is paid from the corporation to the shareholder. The tax is refunded at a rate of $38 for every $100 of dividends paid.

Non-Taxable Gain

The non-taxable gain is credited to the corporation’s Capital Dividend Account. The Capital Dividend Account is non-taxable both at the corporate level and the individual level. The Capital Dividend Account is calculated in aggregate, including all realized capital gains and capital losses. Realized capital losses grind the corporation’s capital dividend account.??

Case Study: The Story of Two Friends

HD 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.

*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.

This article has been published for general information. You should always contact your trusted advisor for specific guidance pertaining to your individual tax needs. This publication is not a substitute for obtaining personalized advice.

If you are looking for Tax Services , Crowe MacKay provides personalized support. Our tax professionals will help you maximize tax-planning opportunities and ensure the minimum amount required by law is paid.