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

Dave Gautier
Insights
| 11/21/2022

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.

Crowe MacKay's tax advisors review 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.  
Capital Gain  Taxable Capital Gain  Non-refundable Tax  Refundable Tax  Capital Dividend Account 
100%  50%  10%  15.3%  50% 
$100,000  $50,000  $10,000  $15,300  $50,000 

Case Study: The Story of Two Friends

HYD 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.  
  HYD Co.  Bing Co. 
Strategy  Do nothing  Tax loss selling 
 Capital Gain [A] 100,000 100,000 
 Taxable Capital Gain 50,000 

50,000

Tax-loss Selling  (50,000) 
Corporate Income  50,000 
Corporate Tax  (25,300) 
Dividend Refund  15,300 
Corporate Tax Payable [B]  (10,000)  0 
Capital Dividend Account  50,000 
Available for Distribution  90,000  100,000 
Taxable Dividend to Individual  40,000 100,000 
Personal Tax Payable* [C]  (19,560)  (48,900) 
Net Cash to Individual [A] +[B]+[C]  70,440  51,100 

*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.

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David’s practice focuses on Canadian tax services and business consulting. He represents private companies and professionals assisting with a wide range of tax matters including: tax compliance; purchase and sale of business; corporate re-organization; trust and estate planning; and CRA dispute resolution. His business consulting practice sees him work side-by-side with business owners and their advisors to provide a harmonized business, accounting, tax, and wealth planning solution.
Dave Gautier
Dave Gautier
Partner, Incorporated, Managing Director (Kelowna)
Kelowna

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