Tax-Smart Investing in a Volatile Market

A volatile market

With the U.S. issuing tariffs worldwide, meaning that the cost and price of consumer goods and commodities would likely rise significantly, the TSE 300 took immediate notice and sold off in dramatic fashion. Investments in stocks fell significantly, and even bonds, traditionally a safer investment, saw prices fall, resulting in losses for many.

If you were an investor who held investments in non-registered taxable accounts and decided to sell in reaction to this volatility, you may have experienced taxable capital gains or losses after these share price fluctuations. Keeping track of these trades will be important once it's time to report your transactions on your tax returns, and in most cases your brokerage or financial institution will report these to the CRA.

If you want to avoid paying too much in taxes as a result of capital gains, there are a few useful strategies you can use to offset your tax bill. To learn more about how you can balance reported gains and losses, let's review some investment tax tips for a volatile market.

Paper losses vs. actual losses

When you buy an investment and later sell it for a lower value, you "realize" a loss. These realized losses count as actual losses. Conversely, if you still hold the investment but it is worth less than you originally paid, you would have a paper loss, or unrealized loss. When you sell for a lower price, you convert your paper loss to a realized loss. A realized loss also happens when the shares leave your hands, such as if you donate them, bequeath them or give them away, or even sometimes when transferring accounts.

If you dispose of this investment in a non-registered taxable account, you may be able to use a loss against other capital gains. To report these capital gains and losses you will report them on Schedule 3 of your tax return.

If you incurred a capital loss in a tax year, you can use it to offset any capital gains income in the same year, lowering your total income. If, however, you have a net capital loss for the year, the CRA allows you to carry those losses back up to 3 years or forward indefinitely to apply against any capital gains income. 

Reporting investment gains and losses

When you've taken an action to sell investments from your portfolio which had paper gains or losses. This converts them to either realized or actual gains and losses, and that means that it's time to report them to the CRA.

If you made these transactions in a non-registered taxable account, you'll recognize a gain or loss and need to report it to the CRA on your tax return. For qualifying investments in a registered investment account, you only realize a gain or loss but do not experience a tax impact and do not have to report to the CRA.

In a year with significant market volatility, the gains or losses you report depend on the transactions you made. If you made several purchases that you then sold at a loss, and these losses are greater than any other gains, you might have capital losses that get carried forward to future years, unless you can offset your recognized gains throughout the year. You must report these gains and losses in the year of the transaction, but can claim them later.

On the other hand, if you had a favourable year and have a significant amount of gain which you cannot offset with matching losses or carried-over losses, you will likely need to pay capital gains taxes. 50% of capital gains are added to your income and then taxed at the marginal rates.

Tax-free and tax-deferred investment plans

If you made trades with the investments held inside a registered investment account, such as a Registered Retirement Savings Plan (RRSP) or Tax Free Savings Account (TFSA), as long as they are a qualifying investment you won't need to worry about this year's market volatility from a tax perspective. Those registered investments grow tax-free. 

The exception is a Registered Education Savings Plan (RESP), where the growth and grant portions of any withdrawals are added to the beneficiaries income and taxed according to their tax rate.

Know your goals and time horizon

Economic fluctuations can be unnerving for your investment portfolio, and your financial goals. When you see your account numbers teeter and concerning headlines appear, you may worry about losing money. If you ignore the market's movements and your investments regain their value, you would likely only experience paper losses and could still end the year in positive territory.

Try not to react impulsively to market events. By setting financial goals with clear time horizons and understanding your risk tolerance, you can make informed decisions about when to buy and sell, and what investment types might be right for you. You can also factor in taxes to your overall investment strategy. 

Consider speaking to a financial advisor and get the tax support you need with TurboTax. Consider TurboTax Assist and Review if you need further guidance, and get unlimited help and advice as you do your taxes. Or, choose TurboTax Full Service for one of our tax experts to do your return from start to finish.