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Benefits of Cutting Your Losses
Successful investors know that investment performance improves if you accept the fact that you are going to make mistakes from time to time. The trick is to deal with these mistakes while they are still small. If you are an investor currently holding a stock or bond that has declined in value or even become worthless, don’t despair. Fortunately for investors, there are some tax benefits you can take advantage of. A loss can be used to your advantage to create a capital loss for tax purposes. The loss is equal to your adjusted cost (total purchase price including any commission) less the net proceeds (if any). Capital losses offset capital gains dollar for dollar and in a year like this – where most investors have made significant gains – they have the potential to save you money!
“A man must be big enough to admit his mistakes, smart enough to profit from them, and strong enough to correct them.” — John C. Maxwell
Here is a short case study that explains how tax loss selling might benefit you:
John Smith (not his real name) aged 73, bought 1,500 shares of Telus shares in his taxable savings and investment account on November 10, 2009 at $31.55 per share, for a total cost of $47,970. John’s Telus shares are currently worth $44.91 per share, so his net proceeds would be $66,735 if he decided to sell them right now. This would give John a profit of $18,765 (in addition to the $3,637.50 in dividend income he received over the past year)!
John agrees that he should sell his Telus shares, realize a profit and invest in another company, but he is concerned about the tax implications. John estimates his retirement income for 2010 will be $62,000 resulting in estimated income tax of $2,786 on his $18,765 capital gain (John lives in BC). Declaring taxable income of $9,382.50 (half of $18,765) would also put John over the $66,733 OAS clawback threshold and as a result he would be required to pay back some of his Old Age Security payments and his pension would be reduced the following year.
John Smith Current Situation:
Telus Corp. Non-Voting “A” 1,500 shares
Adjusted Cost: $47,325 + $645 commission = $47,970
Net Proceeds: $67,365 less $630 commission = $66,735
Capital Gain: = $18,765
Estimated tax bill (14.85% marginal capital gains tax rate): = $ 2,786
On reviewing John’s holdings, we notice that he has only one position at a loss: 600 shares of CIBC that he bought at his previous brokerage in October 2007 for $102.22 per share plus commission for a total cost of $62,128. Unfortunately, his total proceeds if we sold them today at $79.06/share would only be $46,938 resulting in a capital loss of $15,190.
Selling both of these stocks makes the most sense for John, since that would free up about $113,673 in his portfolio, and he would only have to declare a net capital gains income of $3,575 incurring taxes of approximately $530.
Canadian Imperial Bank of Commerce 600 shares
Adjusted Cost: $61,332 + $796 commission = $62,128
Net Proceeds: $47,436 less $498 commission = $46,938
Offsetting Capital Loss: = ($15,190)
Net Taxable Capital Gain ($18,765-$15,190) = $3,575
Estimated tax bill (14.85% marginal capital gains tax rate): = $ 530
Not only does, selling his CIBC stock at a loss reduce John’s income taxes, but it also keeps his income within the $66,733 OAS clawback limit.
Professional advice can add real value.
If you or someone you know would like to take advantage of a free, no obligation, confidential consultation to review your financial affairs, just call me at 250.405.2429 or e-mail april.dorey@raymondjames.ca. A second opinion can give you the peace of mind to know you’re doing everything possible to protect your assets that you’ve worked so hard to acquire and that you’re making those decisions in partnership with a professional.
Rusty Goepel, who is an officer and director of Raymond James Ltd. or its affiliates serves as a director of Telus.
April M. Dorey, B.Comm, FMA, FCSI
T: 250.405.2429 or 1.877.405.2400
april.dorey@raymondjames.ca
www.aprildorey.com
*Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. You should discuss any tax or legal matters with the appropriate professional. Written by April Dorey and expresses the opinions of the author and not necessarily those of Raymond James Ltd. Statistics and factual data and other information in this newsletter are from sources RJL believes to be reliable but their accuracy cannot be guaranteed. Securities-related products and services are offered through Raymond James Ltd., member CIPF. Financial planning and insurance products and services are offered through Raymond James Financial Planning Ltd., which is not a member CIPF. In accordance with privacy legislation, the individuals you are referring must consent to their information being provided to me.
© April Dorey. Articles, statistics and other data referred to or cited are intended to provide readers with potentially useful information for their own personal use. *Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. You should discuss any tax or legal matters with the appropriate professional. Reproduction without permission is permitted with due acknowledgement. The views expressed are those of the author, April M. Dorey, and not necessarily those of Raymond James Ltd. It is provided as a general source of information only and should not be considered to be personal investment advice or a solicitation to buy or sell securities. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. The information contained in this article was obtained from sources believed to be reliable, however, we cannot represent that it is accurate or complete. Raymond James Ltd. is a member of the Canadian Investor Protection Fund.
For more information please contact:
April Dorey, B.Comm, FMA, FCSI
Financial Advisor
Raymond James
10th Floor, 1175 Douglas Street
Victoria, BC.
Tel. 250-405-2429
www.aprildorey.com
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