The great Canadian tax-loss hunt

Guest columnist Samantha Prasad, LL.B., asks whether it's time to sell your winners.

The great Canadian tax-loss hunt
Is it time to sell your winning stocks? Given recent stock market highs, plenty of investors are thinking that now’s the time to sell and lock in those juicy gains. That may or may not be a good idea from an investment standpoint. But from a tax perspective, triggering capital gain can also trigger a tax bill – remember, you have to include 50% of capital gains in income, to be taxed at your top marginal rate. To help soften the blow, here are some places to look for tax losses (some obvious, others not so much) that could shelter or offset capital gains tax.
Look for bad loans. These include things like bad mortgage investments or junk bonds (or even a no-good advance to your company or a bad loan to a business associate).
To obtain a deduction, the loan must generally have been documented and have been interest-bearing. So if you made a loan to a relative on an interest-free basis, the Canada Revenue Agency (CRA) can argue that the loan was not taken out for income-earning purposes. Therefore, no loss is available. Make sure you dot your i’s and cross your t’s when it comes to setting up a loan.
An exception arises if you are a shareholder of a Canadian corporation and have advanced funds to it on a low- or no-interest basis. In this case, and if certain conditions are met, the CRA will give you at least a capital loss on the bad loan.
When is a loan bad? The feds say that claiming a bad debt loss on a loan is basically an all-or-nothing proposition. The entire loan must be uncollectible in order for it to be a bad-debt loss, or if a portion of the debt has been "settled," the remainder must be uncollectible.
Also, you must have exhausted all legal means of collecting the debt, or the debtor must have become insolvent, with no means of paying the debt.
Going, going, gone…out of business. Another overlooked source of tax losses to shelter gains is in investments you might have made in companies that have gone bankrupt or are now worthless because of insolvency and cessation of business activities. This may often include a company that has been delisted from a stock exchange.
Note: If a bad investment is in a Canadian private company that was devoted to active business, the loss could qualify as an "Allowable Business Investment Loss" (ABIL). If so, this type of loss can be deducted against any type of income, whereas a normal capital loss can be deducted only against capital gains.
Beware, however, that if you claim an ABIL, it has become standard procedure for the CRA to follow up with more questions to ensure that the ABIL is being properly claimed.
Money-losing bonds. It sounds counterintuitive, but you can in fact lose money on a bond investment. This could happen if you invested in a bond at a premium price over its par value (this would be the case if the coupon rate on the bond was higher than the prevailing interest rates when you purchased the bond). If so, and the investment is in a non-registered account, there will probably be a capital loss if you hold the bond to maturity or if you sell the bond after its price has fallen (bond prices move inversely to interest rate movements, so if rates go up, bond prices fall).
Courtesy Fundata Canada Inc. ©2014. Samantha Prasad, LL.B., is Tax Partner with Toronto law firm Minden Gross LLP. Portions of this article appeared in The TaxLetter, published by MPL Communications Ltd.