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 accountA)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.
RationaleThe 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.