Transfer of Capital Losses to Spouse

By: Caroline Nalbatoglu

Do you have capital losses while your spouse has gains? We have a strategy for you!

It’s a rare investor who hasn’t experienced capital losses over the past year’s turmoil in  the markets. If you’re not able to claim the loss in the current year (because you have no capital gains to offset), you can carry the loss back three years or forward indefinitely to  offset gains in other years. But there’s also a strategy available whereby you can transfer losses to your spouse.

Here’s how it works. Martin has 500 shares of  XYZ Holdings that he bought at $10 per share, and which are now worth $3 per share. He would like to sell the shares, but he has no  capital gains in the current year or the three previous years to absorb the loss. Martin could carry the loss forward, but he prefers to  take advantage of claiming it sooner rather than later. However, Martin’s wife, Sylvie, has extensive capital gains from two years ago. Martin sells his shares and incurs a loss of  $3,500 (500 shares x $7). Sylvie immediately buys 500 shares of XYZ Holdings at $3 per share. This step triggers the superficial loss  rule, which comes into play when a taxpayer sells securities at a loss, and the identical property is acquired by the taxpayer, his/her  spouse, or a corporation controlled by the taxpayer or his/her spouse within a 61-day period around the sale (30 days before the sale and 30 days afterward). Under this rule,  Martin is denied the use of the loss, and the amount of the loss is added to the cost base of the securities purchased by Sylvie.

Sylvie’s cost base has now increased from $1,500 to $5,000. She must hold the shares for at least 30 days, but can sell them anytime  after that. If we assume the share price has stayed the same as when she bought them, she will be able to declare a loss of $3,500 ($5,000 - $1,500) on the sale. This loss can  then be carried back to offset some of Sylvie’s capital gains from two years ago.

While your PWL advisor monitors your  accounts carefully to take advantage of tax-loss selling, you may also be able to identify opportunities along these lines. If this strategy is of  interest to you, please contact your PWL advisor.