Author Topic: Tax Loss Harvesting for Canadians  (Read 1752 times)

max9505672

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Tax Loss Harvesting for Canadians
« on: August 26, 2017, 08:28:37 AM »
Introduction

I would like to start a discussion about Tax Loss Harvesting (TLH) and the particularities associated to it for Canadians to help people (including myself) get the most out of this strategy. TLH is a great way of taking advantage of a bad economic period, and since we all know there are going to be many of them in our FIRE journey, better be prepared.

First, if for you TLH is completely new, I invite you to take some time and read the following articles. Great introduction and lots of good information in there.
*Feel free to link any other articles / posts that you consider could help improve this thread and I'll add them to the list.

Topic to Clarify

I would like the majority of the information to be gathered on the initial post to facilitate the search for information. In order to do this, I thought of creating a series of initial topics that I personally want to clarify and that will remain in sticky on the initial post. I will then update each of the ''Topics to Clarify'' with the most appropriate answer(s).

I also invite the participants in the discussion to ask their questions and add new topics to clarify. I will then update the initial post with the elements that bring value to this discussion. I will be somehow be the administrator of the initial post.

So let's begin!

  • 1. What is the yearly maximum that can be deducted in Canada from TLH (US is 3000$/year)? Is it federal or provincial jusrisdiction?
______________________________________________________________________________________________________________________

  • 2. Is there a maximum total that can be deducted over one person's lifetime?
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  • 3. Is there a time limit to deduct the harvested money? Let's say, for example, that someone decides to harvest on 200K$ on a -30% market collapse = 60000$ total harvested. If the annual maximum that can be deducted is 3K$ and considering no other harvesting, this person would be looking at 20 years of deduction room. Is this possible?
______________________________________________________________________________________________________________________

  • 4. Over what kind of gain or income can tax loss harvested money can be deducted (taxable income, capital gains only)?
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  • 5. Is there a general consensus on the best time to deduct? I know part of the strategy is to deduct when you are in a higher tax bracket. Therefore, that fixed amount you can deduct each year (ex. 3K$) will get you more (a bigger loan from the government). But on the other hand, if you wait to be if that higher tax bracket, you're not getting the compounding interests of the loan over time... I know this is case by case and different for every person and depends on many other variables too (especially your FIRE tax bracket), but are there general advices on this topic?
______________________________________________________________________________________________________________________

  • 6. Is a ''wash sale'' illegal? What's the worst that can happen if CRA catches you with a ''wash sale''?
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  • 7. What is the timeframe in Canada (or in each province) before and after the sell not to be considered a ''wash sale'' (U.S. is 30 days)?
______________________________________________________________________________________________________________________


  • 8. For those of you using a ''dollar cost averaging'' investment method i.e. frequent investments, can TLH be effectively done without the use of a software such as the one Betterment offers? Let's say I own 60K$ of VCN.TO that was bought over 5 years with regular 1000$ monthly investments and a good TLH opportunity comes to me. I know the buying price of each investments and the actual price of the ETF. And, naturally, each of those 1000$ will have different loss % depending on when they were bought. So, how does it work if I sell, let's say, 30K$ of those VCN.TO? Do I get to choose which ones I want to sell?
______________________________________________________________________________________________________________________

[/list]

Mr. Rich Moose

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Re: Tax Loss Harvesting for Canadians
« Reply #1 on: August 26, 2017, 10:29:44 AM »
1. There's no yearly limit to realized capital losses. However, capital losses can only be used to offset capital gains. Capital losses can be carried forward indefinitely. Losses can also be applied to realized capital gains up to three tax years back (loss carry-back).

2. There is no lifetime limit to capital losses. It's important to remember they can only be used to offset capital gains.

3. Realized losses can be carried forward indefinitely. They can also be used against capital gains realized in the prior 3 tax years. Your capital losses have to be used in the order they were realized. For example, if you realized a loss in 2007 and 2008 and realized a gain in 2016. You must first offset against the loss in 2007 and then you can realize the loss in 2008. They can both be used against the same gain. It might also have to be adjusted for inclusion rates. For example, if the inclusion rate in 2007 was 75% and today it's 50% the loss must be adjusted. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-127-capital-gains/definitions-capital-gains.html#Adjustmentfactor

4. Capital gains only. Losses cannot be applied against any other forms of income.

5. It's not quite this simple because capital losses are limited to offsetting capital gains. As far as I'm aware, you are not required to offset a gain in any year by the carried forward loss, so by this reasoning, it would be best to offset realized gains in years where your other income is also high.

6. Wash sales are referred to as superficial losses in Canada. You (or your spouse) cannot repurchase a substantially identical asset within 30 days of selling that asset at a loss. This includes options etc. However, the product must be substantially identical. For example, you cannot sell XIC.TO and buy ZCN.TO because they are both ETFs which track the TSX Capped Composite Index. However, you would be able to buy XIU.TO within 30 days because it tracks the different TSX 60 Index. This is important!

7. 30 calender days. To be safe, use the date your trade actually settled.

8. If it's the same ETF, you would use the weighted average cost of the ETF. This is called your Adjusted Cost Base. Here's where DRIPping is tricky. If you DRIP, you have to keep track of the impact of the DRIP purchases on your weighted average cost. Simple solution: don't DRIP in taxable accounts.
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max9505672

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Re: Tax Loss Harvesting for Canadians
« Reply #2 on: August 26, 2017, 12:02:15 PM »
1. There's no yearly limit to realized capital losses. However, capital losses can only be used to offset capital gains. Capital losses can be carried forward indefinitely. Losses can also be applied to realized capital gains up to three tax years back (loss carry-back).

Ho ok. This seems, in my opinion, less advantageous than in the US where they can offset taxable income too.

2. There is no lifetime limit to capital losses. It's important to remember they can only be used to offset capital gains.
Got it!

3. Realized losses can be carried forward indefinitely. They can also be used against capital gains realized in the prior 3 tax years. Your capital losses have to be used in the order they were realized. For example, if you realized a loss in 2007 and 2008 and realized a gain in 2016. You must first offset against the loss in 2007 and then you can realize the loss in 2008. They can both be used against the same gain. It might also have to be adjusted for inclusion rates. For example, if the inclusion rate in 2007 was 75% and today it's 50% the loss must be adjusted. https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/personal-income/line-127-capital-gains/definitions-capital-gains.html#Adjustmentfactor
That's good to know, never heard about inclusion rate before.

4. Capital gains only. Losses cannot be applied against any other forms of income.
OK!

5. It's not quite this simple because capital losses are limited to offsetting capital gains. As far as I'm aware, you are not required to offset a gain in any year by the carried forward loss, so by this reasoning, it would be best to offset realized gains in years where your other income is also high.
Mmmm ok.. For someone thinking about FIRE'ing quite early in its life and staying invested all the way to FIRE, this is suddenly less interesting, assuming a low FIRE tax bracket. For example, someone from Quebec FIRE'ing with an annual net income of 30K$ will be in the lowest tax bracket. (Reference : http://www.taxtips.ca/taxrates/qc.htm)

From that 30K$, some money will come from registered accounts such as RRSP and TFSA, which aren't eligible for TLH. Then, a certain part will also come from taxable account. From that part, only a certain % is going to be from capital gains...

So I guess there's is an advantage of using this to a certain extent, but not as advantageous as it is in the US.

Am I missing something here?

6. Wash sales are referred to as superficial losses in Canada. You (or your spouse) cannot repurchase a substantially identical asset within 30 days of selling that asset at a loss. This includes options etc. However, the product must be substantially identical. For example, you cannot sell XIC.TO and buy ZCN.TO because they are both ETFs which track the TSX Capped Composite Index. However, you would be able to buy XIU.TO within 30 days because it tracks the different TSX 60 Index. This is important!
Yes I understand, but I think depending on the products you sell and buy, there's a certain gray zone where it's not 100% clear if it's ''substantially identical'' enough. That's why I was wondering what's the worst that can happen to someone making a mistake and doing a superficial loss. Are there any other consequences than not being able to used this ''harvested'' money?

7. 30 calender days. To be safe, use the date your trade actually settled.
So let's say you sell on Sept. 1st 2017 and it settle on Sept. 5th. Than you can't buy the same products (or a substantially identical one) before Oct. 5th. But what about the days between August 5th and Sept. 5th? Could you buy/sell the same product?

8. If it's the same ETF, you would use the weighted average cost of the ETF. This is called your Adjusted Cost Base. Here's where DRIPping is tricky. If you DRIP, you have to keep track of the impact of the DRIP purchases on your weighted average cost. Simple solution: don't DRIP in taxable accounts.
Would you have an example for this?

daverobev

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Re: Tax Loss Harvesting for Canadians
« Reply #3 on: August 26, 2017, 03:03:45 PM »
You're asking a lot of questions which the *average person* shouldn't worry about. If you tax loss harvest while you're working, and don't spread (reset) the gains later in life, chances are your estate will pay a higher tax rate than had you just stayed invested.

Note that you can buy VCN after selling ZCN because VCN tracks a (slightly!) different index than ZCN - one is FTSE, one S&P.

If you're a trader, you can always try to offset within a year. I'm more concerned about, later on - but before OAS I guess - resetting (IE, taking some gains in low income years, before other income starts coming in... this will be tricky as I'll also be trying to run down my RRSP...)

Re: 6 - it is *perfectly* legal to rebuy something you sold, but the capital loss is not allowed; instead, you have to adjust your cost basis accordingly.

8 - If you buy 100 shares at $10, and 50 shares at $20, you have paid exactly $1000 + $1000 = $2000. You have 150 shares. Your ACB (adjusted cost basis) is $2000/150 per share = $13.33. Shares are 'fungible'; they are identical in all respects. So you take the average, including any trading costs, of all purchases. When you sell, your capital gain is vs the ACB price.

So, if you sold 10 shares at $23.33, you would have a gain of $10 a share = $100. Clear?
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max9505672

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Re: Tax Loss Harvesting for Canadians
« Reply #4 on: August 27, 2017, 09:42:19 AM »
You're asking a lot of questions which the *average person* shouldn't worry about. If you tax loss harvest while you're working, and don't spread (reset) the gains later in life, chances are your estate will pay a higher tax rate than had you just stayed invested.
Yes, I'm starting to think the same.. That kind of sucks, our neighbors in the South have so much better opportunities regarding TLH.

If you're a trader, you can always try to offset within a year. I'm more concerned about, later on - but before OAS I guess - resetting (IE, taking some gains in low income years, before other income starts coming in... this will be tricky as I'll also be trying to run down my RRSP...)
Yeah, I'm not and I doubt most poeple here are traders... Hopefully, in a near future, someone is going to offer a similar product than Betterment does in the US. This might be a good option for taxable accounts...

8 - If you buy 100 shares at $10, and 50 shares at $20, you have paid exactly $1000 + $1000 = $2000. You have 150 shares. Your ACB (adjusted cost basis) is $2000/150 per share = $13.33. Shares are 'fungible'; they are identical in all respects. So you take the average, including any trading costs, of all purchases. When you sell, your capital gain is vs the ACB price.

So, if you sold 10 shares at $23.33, you would have a gain of $10 a share = $100. Clear?
Yes, very clear, thank you.

Goldielocks

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Re: Tax Loss Harvesting for Canadians
« Reply #5 on: September 01, 2017, 10:21:46 AM »

Quote from: Mr. Rich Moose on August 26, 2017, 10:29:44 AM
5. It's not quite this simple because capital losses are limited to offsetting capital gains. As far as I'm aware, you are not required to offset a gain in any year by the carried forward loss, so by this reasoning, it would be best to offset realized gains in years where your other income is also high.
Mmmm ok.. For someone thinking about FIRE'ing quite early in its life and staying invested all the way to FIRE, this is suddenly less interesting, assuming a low FIRE tax bracket. For example, someone from Quebec FIRE'ing with an annual net income of 30K$ will be in the lowest tax bracket. (Reference : http://www.taxtips.ca/taxrates/qc.htm)

From that 30K$, some money will come from registered accounts such as RRSP and TFSA, which aren't eligible for TLH. Then, a certain part will also come from taxable account. From that part, only a certain % is going to be from capital gains...

So I guess there's is an advantage of using this to a certain extent, but not as advantageous as it is in the US.

Am I missing something here?


I did find one area (Mr Moose referred to it, but I will emphasize it) where tax loss makes a lot of sense --
When you have years of HIGH / LOW income.    The idea is to shift the capital gains and income taxes paid from a higher bracket to a lower bracket. 

This applies especially for contractors or people who leave one job to start another, or who know they will get a bonus or income windfall one year, with the next year being low.   e.g., retirement severance,  selling employee stock options, or going FIRE.  Income spikes happen as we near and prepare for FIRE.

Because you can carry forward losses indefinitely, and carry back 3 years...  If you have a low tax bracket year, sell your positive capital gains, and repurchase after a 30 day gap.  This will mean less taxes during retirement / later years.   If it is "time" to sell your loss investment, always sell your losses when it is time, without worrying about tax impact, but you are in a low tax year, carry the losses forward... just hold on to them until you have an income spike that is trigger by a huge capital gain or decent income plus modest capital gains due to "right time" to sell.. (income spike is created by selling  a rental property or stock options that can't be split over several years)

By doing this, you can shave the gains taxes in your portfolio by up to 10% for the average person.. (for the losses / gains that happen around income "spike/drop" years).

I will mention, that it is hard (emotionally) to carry forward losses more than a year or two, when you have a decent income (e.g., $85k+) and some gains the next year, and could utilize the tax reduction...  but it is best to wait and carry forward losses until you can apply them to the top tax brackets.

I believe only NET losses from the year can be carried forward, so if you are tax harvesting, designed for carry over to a high year, don't sell capital gains in the same year you create losses.

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Re: Tax Loss Harvesting for Canadians
« Reply #6 on: September 01, 2017, 04:46:36 PM »

Quote from: Mr. Rich Moose on August 26, 2017, 10:29:44 AM
5. It's not quite this simple because capital losses are limited to offsetting capital gains. As far as I'm aware, you are not required to offset a gain in any year by the carried forward loss, so by this reasoning, it would be best to offset realized gains in years where your other income is also high.
Mmmm ok.. For someone thinking about FIRE'ing quite early in its life and staying invested all the way to FIRE, this is suddenly less interesting, assuming a low FIRE tax bracket. For example, someone from Quebec FIRE'ing with an annual net income of 30K$ will be in the lowest tax bracket. (Reference : http://www.taxtips.ca/taxrates/qc.htm)

From that 30K$, some money will come from registered accounts such as RRSP and TFSA, which aren't eligible for TLH. Then, a certain part will also come from taxable account. From that part, only a certain % is going to be from capital gains...

So I guess there's is an advantage of using this to a certain extent, but not as advantageous as it is in the US.

Am I missing something here?


I did find one area (Mr Moose referred to it, but I will emphasize it) where tax loss makes a lot of sense --
When you have years of HIGH / LOW income.    The idea is to shift the capital gains and income taxes paid from a higher bracket to a lower bracket. 

This applies especially for contractors or people who leave one job to start another, or who know they will get a bonus or income windfall one year, with the next year being low.   e.g., retirement severance,  selling employee stock options, or going FIRE.  Income spikes happen as we near and prepare for FIRE.

Because you can carry forward losses indefinitely, and carry back 3 years...  If you have a low tax bracket year, sell your positive capital gains, and repurchase after a 30 day gap.  This will mean less taxes during retirement / later years.   If it is "time" to sell your loss investment, always sell your losses when it is time, without worrying about tax impact, but you are in a low tax year, carry the losses forward... just hold on to them until you have an income spike that is trigger by a huge capital gain or decent income plus modest capital gains due to "right time" to sell.. (income spike is created by selling  a rental property or stock options that can't be split over several years)

By doing this, you can shave the gains taxes in your portfolio by up to 10% for the average person.. (for the losses / gains that happen around income "spike/drop" years).

I will mention, that it is hard (emotionally) to carry forward losses more than a year or two, when you have a decent income (e.g., $85k+) and some gains the next year, and could utilize the tax reduction...  but it is best to wait and carry forward losses until you can apply them to the top tax brackets.

I believe only NET losses from the year can be carried forward, so if you are tax harvesting, designed for carry over to a high year, don't sell capital gains in the same year you create losses.
Wouldn't you miss out on the gains you would have had? By delaying the collection of refunds, you get more back from the government, at the expense of what you get back from the market.

So if you get 10% more by delaying, but the market went up 15%, you actually come out -5%. Carrying losses forward more than 2 years will put you at risk for this. This is essentially a form of market timing where you say the market will under perform the gains from the refund. In some cases that's true, for a year or two, rarely is it true for 3+ years. Would you bet the next 3 years will be under 4% returns? If so, you should probably sell all your stocks and invest accordingly.

Goldielocks

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Re: Tax Loss Harvesting for Canadians
« Reply #7 on: September 01, 2017, 05:21:22 PM »

Quote from: Mr. Rich Moose on August 26, 2017, 10:29:44 AM
5. It's not quite this simple because capital losses are limited to offsetting capital gains. As far as I'm aware, you are not required to offset a gain in any year by the carried forward loss, so by this reasoning, it would be best to offset realized gains in years where your other income is also high.
Mmmm ok.. For someone thinking about FIRE'ing quite early in its life and staying invested all the way to FIRE, this is suddenly less interesting, assuming a low FIRE tax bracket. For example, someone from Quebec FIRE'ing with an annual net income of 30K$ will be in the lowest tax bracket. (Reference : http://www.taxtips.ca/taxrates/qc.htm)

From that 30K$, some money will come from registered accounts such as RRSP and TFSA, which aren't eligible for TLH. Then, a certain part will also come from taxable account. From that part, only a certain % is going to be from capital gains...

So I guess there's is an advantage of using this to a certain extent, but not as advantageous as it is in the US.

Am I missing something here?


I did find one area (Mr Moose referred to it, but I will emphasize it) where tax loss makes a lot of sense --
When you have years of HIGH / LOW income.    The idea is to shift the capital gains and income taxes paid from a higher bracket to a lower bracket. 

This applies especially for contractors or people who leave one job to start another, or who know they will get a bonus or income windfall one year, with the next year being low.   e.g., retirement severance,  selling employee stock options, or going FIRE.  Income spikes happen as we near and prepare for FIRE.

Because you can carry forward losses indefinitely, and carry back 3 years...  If you have a low tax bracket year, sell your positive capital gains, and repurchase after a 30 day gap.  This will mean less taxes during retirement / later years.   If it is "time" to sell your loss investment, always sell your losses when it is time, without worrying about tax impact, but you are in a low tax year, carry the losses forward... just hold on to them until you have an income spike that is trigger by a huge capital gain or decent income plus modest capital gains due to "right time" to sell.. (income spike is created by selling  a rental property or stock options that can't be split over several years)

By doing this, you can shave the gains taxes in your portfolio by up to 10% for the average person.. (for the losses / gains that happen around income "spike/drop" years).

I will mention, that it is hard (emotionally) to carry forward losses more than a year or two, when you have a decent income (e.g., $85k+) and some gains the next year, and could utilize the tax reduction...  but it is best to wait and carry forward losses until you can apply them to the top tax brackets.

I believe only NET losses from the year can be carried forward, so if you are tax harvesting, designed for carry over to a high year, don't sell capital gains in the same year you create losses.
Wouldn't you miss out on the gains you would have had? By delaying the collection of refunds, you get more back from the government, at the expense of what you get back from the market.

So if you get 10% more by delaying, but the market went up 15%, you actually come out -5%. Carrying losses forward more than 2 years will put you at risk for this. This is essentially a form of market timing where you say the market will under perform the gains from the refund. In some cases that's true, for a year or two, rarely is it true for 3+ years. Would you bet the next 3 years will be under 4% returns? If so, you should probably sell all your stocks and invest accordingly.

That thinking relies on three assumptions:

1)  That you would put 100% of your tax refund each year back into the RRSP.
2)  That the market would grow quite quickly.
3)   That you don't have the RRSP money growing within the RRSP..  In my example, you put all the money into the RRSP, but you just defer claiming the credit at year end / tax time.   (Maybe you said this, I am not sure..rereading it now..because you don't lose by -5 in your example, you lose out by "Marginal tax rate" x (-5% growth).. which is closer to -1.8% because the rest of the money is growing tax free in your RRSP already)

Thoughts
1) I have found that RRSP contributions that are not through my employer generate a large tax deducation, that I use to spend on many other things, like home insurance, car insurance, and property taxes, that come due within a few months of my tax refund, so I actually don't top up my account with them.   I know, I know,  but that is how it is.  Many people do not invest 100% of the RRSP refund, some because they are already maxed out, and others because they are already saving a hefty portion monthly.

2)
The market would need to grow substantially over the 5 to 7 years that it would take before someone in OP's position to apply the RRSP gradually to the top tax tier.   After all, you only lose out on the growth of the REFUND portion, and by only claiming it at the top tax margins, you also save 7 to 12% of the total contribution, not the growth of the refund portion...(just not per year).

Hmm.

Example, $40,000 put into an RRSP from your savings account or taxable account


A)Claim it all the first year, dropping from $100k net income to $60k net income.   RRSP Tax refund on this is $13,800  for Ontario.
Person then puts $10,000  (72%) of it as ADDITIONAL RRSP contributions, over and above their normal amount, to RRSP the following year.
$10,000 x 7% average growth x 4 years = $13,100 is sitting the account after 4 years.

 B)  Claim $10k of it each year for 4 years,   (dropping annual income below $90k)..
Tax refund over 4 years: $4300 x 4 = $17,200 total...   Put 72% of it  ($3100) into RRSP each year, and you have $17,800 extra at the end of 4 years.

Obviously not all marginal tax jumps are as high as the one from $90k to $100k in Ontario, but this is an example that shows how it works.  It would work with smaller amounts or greater stock market gains with a smaller net benefit.  The longer you wait until you claim, the more tax brackets you need to jump over to make it worth more than the compounded return. 

Rationale

The reason I notice this option, IRL, is that many people in their first 5-7 years of working would be better off deferring if they expect future salary increases to be quite strong,  (Eg. Engineer starting at $60k, average salary of $120k after 12 years?) OR if you are coming up to FIRE within 5 years, or large bonus payout, and will trigger a one time large income if you rollover accounts, sell stock options,  get vacation pay or a severance, or what have you, that will spike income in a single year.   This happened to me, with an IRA to RRSP rollover, and it artificially spiked my income to the 50% marginal bracket, and having RRSP credits or room would have been much nicer than back when I was only at the 25% tax bracket.

« Last Edit: September 01, 2017, 05:29:12 PM by Goldielocks »

Prairie Stash

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Re: Tax Loss Harvesting for Canadians
« Reply #8 on: October 02, 2017, 12:01:27 PM »

I appreciate the reply.

Your example assumes that the person has a lump sum of $40,000 and cant max out future RRSP room as their wages grow/year. In the case of regular incomes/annual contributions, why not make contributions out of that years salary?

In Case B you had annual income of $100K each year, but you still put $40k in the first year. Are you suggesting that the person making $100k/year can't find 10k each year but can find $40k in a single year? In your case example you said it makes sense for fluctuating incomes (contractors) but then use constant incomes to make your math work. If they have low income in a year, you wouldn't claim the RRSP, which drags out the timeline in favour of Case A.

You have also neglected the benefits of investing outside the RRSP in a down market. Many people forget the third investment option of taxable accounts, your case scenario missed it entirely. In scenario B you missed it entirely.

Scenario C:
put 10K in the first year and 30k in an investment account. Pull 10k/year from that account to fund years 2-4 RRSP contributions (so far matching case B for tax refunds). Have the money in exactly the same investments as the RRSP, matching gains/loss as case B. If they money increases in value you pay capital gains at 50% of the marginal rate but then claim additional RRSP deductions (even bigger refunds or you put the gains into the RRSP in year 5). If their is a loss you claim the loss and offset future tax bills; not available in the RRSP case B scenario.

Case C matches B with additional refunds.

Goldielocks

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Re: Tax Loss Harvesting for Canadians
« Reply #9 on: October 02, 2017, 02:24:38 PM »
Hi..

The RRSP room growth is identical in both scenarios...   The room grows according to your income the prior year, and that is unchanged.

If you claim your RRSP contributions in year1, they don't roll over into Year 2, but you don't gain or lose any total room.

Quote
Your example assumes that the person has a lump sum of $40,000 and cant max out future RRSP room as their wages grow/year. In the case of regular incomes/annual contributions, why not make contributions out of that years salary?

I assume that the person contributes to their RRSP the maximum each year.  They just defer claiming it against their taxes until a future year when they have high marginal taxes, due to pay raises (assumed here, rather than incremental 1% pay increases a year).   

In general, if you intend to hold an investment for a while, it is better to keep it in a tax deferred account rather than a taxable account, because the income that is earned can compound before taxes are taken.  Because the money is put into the RRSP in both A and B in year 1, there was no scenario left for additional monies to put into the non-taxable account.

For your scenario C, I can not see why this is better than putting $40k into the RRSP in year 1, and claiming the tax return credits in a future year when your tax rate is higher..

The only advantage would be in the case of capital losses, in which case, I advocate that the person first max out retirement accounts with more conservative (less likely to lose money) like VStax, and put the junk bonds, penny stocks, options, calls and puts  (and foreign dividends for that matter) into a taxable account with your excess money.   Such a diversified portfolio well managed, will hopefully return net positive returns (gains - losses), and the tax loss credits in this case helps to accelerate the gains.
« Last Edit: October 02, 2017, 02:36:44 PM by Goldielocks »

Prairie Stash

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Re: Tax Loss Harvesting for Canadians
« Reply #10 on: October 02, 2017, 05:03:08 PM »
Hi..

The RRSP room growth is identical in both scenarios...   The room grows according to your income the prior year, and that is unchanged.

If you claim your RRSP contributions in year1, they don't roll over into Year 2, but you don't gain or lose any total room.

Quote
Your example assumes that the person has a lump sum of $40,000 and cant max out future RRSP room as their wages grow/year. In the case of regular incomes/annual contributions, why not make contributions out of that years salary?

I assume that the person contributes to their RRSP the maximum each year.  They just defer claiming it against their taxes until a future year when they have high marginal taxes, due to pay raises (assumed here, rather than incremental 1% pay increases a year).   

In general, if you intend to hold an investment for a while, it is better to keep it in a tax deferred account rather than a taxable account, because the income that is earned can compound before taxes are taken.  Because the money is put into the RRSP in both A and B in year 1, there was no scenario left for additional monies to put into the non-taxable account.

For your scenario C, I can not see why this is better than putting $40k into the RRSP in year 1, and claiming the tax return credits in a future year when your tax rate is higher..

The only advantage would be in the case of capital losses, in which case, I advocate that the person first max out retirement accounts with more conservative (less likely to lose money) like VStax, and put the junk bonds, penny stocks, options, calls and puts  (and foreign dividends for that matter) into a taxable account with your excess money.   Such a diversified portfolio well managed, will hopefully return net positive returns (gains - losses), and the tax loss credits in this case helps to accelerate the gains.
You changed your assumptions...multiple times. You started by saying the person is a contractor with high/low income years then illustrated a constant spread of 4 years of high income to prove your case. But what about the low income years where it makes no sense to do RRSP contributions?

Goldielocks

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Re: Tax Loss Harvesting for Canadians
« Reply #11 on: October 02, 2017, 09:06:17 PM »
Prairie stash... I posted a reply to your comment over  a month after the original post.  Of course I changed the premise.  I was trying to answer your specific new question, which did not seem to grasp the idea I attempted to convey on Sept 1st.  If I screwed the explanation up today, so be it.


Per the original note -- "wouldn't you miss out of the gains..."...
The answer is no, if you put the money into a RRSP the same (starter) year that you have the money.  If you expect to spike into a larger tax bracket in the next 5-7 years, it is usually better to put the money into the RRSP, now, and defer claiming it on tax return for credits until you hit the higher brackets in future.

What you "miss" is the gain on the tax refund in the near term, if you had invested the full refund (which most people don't). BUT,  This is offset by the larger tax refund when it is applied to higher income years.   It only works if you think you will have a much larger year (s) for income in your near future. such as promotions or stock options, or even a large capital gain through sale of a property.

« Last Edit: October 02, 2017, 09:14:09 PM by Goldielocks »

Prairie Stash

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Re: Tax Loss Harvesting for Canadians
« Reply #12 on: October 03, 2017, 11:52:22 AM »
Prairie stash... I posted a reply to your comment over  a month after the original post.  Of course I changed the premise.  I was trying to answer your specific new question, which did not seem to grasp the idea I attempted to convey on Sept 1st.  If I screwed the explanation up today, so be it.


Per the original note -- "wouldn't you miss out of the gains..."...
The answer is no, if you put the money into a RRSP the same (starter) year that you have the money.  If you expect to spike into a larger tax bracket in the next 5-7 years, it is usually better to put the money into the RRSP, now, and defer claiming it on tax return for credits until you hit the higher brackets in future.

What you "miss" is the gain on the tax refund in the near term, if you had invested the full refund (which most people don't). BUT,  This is offset by the larger tax refund when it is applied to higher income years.   It only works if you think you will have a much larger year (s) for income in your near future. such as promotions or stock options, or even a large capital gain through sale of a property.
I'll run the math.
$10,000 claim now or in 3 years, note its not an all or nothing $40,000 as in your example, it can be adjusted.

Ontario sucks as an example due the multitude of tax brackets, bear with me, its easier in a lot of other provinces.
Bracket from 87,559-91833  (for $4234) gets taxed at 37.91%
You advocated delaying the claim because the top bracket has a margin of 43.41%. By delaying and claiming against the higher bracket you get an additional $232 on the $4234, looking good so far.

However if you take it immediately and get 6% return, over those three years you could have an additional $306, on which you would owe taxes of $66 (capital gains in the higher 43.41% bracket), leaving you a mere $240.
*for those keeping track, I'm only talking about the refund, the principle is invested inside the RRSP either way
**To skew it more in favour of getting the refund, you can put the money into the RRSP the following year (assuming there's room) and skip the gains tax. I chose to include the gains tax for illustration that the RRSP room is irrelevant

So after 3 years, you would be up $8 on having the money in a taxable account at 6% returns. Every year after keeps adding more to the argument to get the money now. If, as you think, you decide to wait 5-7 years, the problem gets worse, after only 3 years you're starting to see negative returns on waiting.

Another normal case is to pay down the mortgage, guaranteed returns, with the refund. The math is simple enough to determine, at current rates it takes a while, at my initial 5% rate on my mortgage it would have made sense to claim it if I had to wait more than 3 years, because there's no capital gains tax. In this case the lower 5% interest rate is better than 6% stock market because of the tax free status. Feel free to play with current rates and find your own breakeven points, at 3% its still under 5 years though (and you advocated that its fine to wait 5-7 years before claiming). So a person with a mortgage waiting 5-7 years for an RRSP claim is still worse off, at today's 3% rates! You don't even need to "invest" the returns, just paying off mortgages is enough for the average Canadian.

Obviously if the tax bracket swings are larger, it makes the case to wait longer. However, even there the math eventually catches up. 7 years is getting into very special circumstances to make the case for, usually that's more about spiting the tax man then rational decisions.

So yes, you do miss out on the gains and it is not offset by a larger refund in 5-7 years. Each year of delay needs to be analyzed individually to find the maximum time its advisable to wait, its poor math to say waiting 5-7 years is a good idea, all the benefits happened in the first 4 years and you actually had negative returns the last couple.

Goldielocks

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Re: Tax Loss Harvesting for Canadians
« Reply #13 on: October 03, 2017, 03:44:29 PM »
No, it is not all or nothing, for an example case, it is easier just to choose it.

As you point out, this is highly dependent on your tax bracket and your actual numbers.    In my example I was trying to figure out if there was ever a case where delaying it would make sense, for a typical person with typical salary progression.    (As most of the time, just claiming it as you go is better).   I did find out the case, it is where you are making under $90k now, but in near future, you will be making over $100k, in Ontario.   

If the jump is from $75k/yr income now to $150k within a couple of years, then that is much better to delay claiming the refund -- perhaps a person newly re-employed in the workforce, with unused RRSP contribution, but only worked for 6 months last year...  or you will be selling an investment property next year that will bump your tax rate up for a single year.

These examples also depend on if the person re-invests their tax refund.   That is the huge failing of many numerical examples.  Human behaviour.