Take advantage of creative ideas when markets fall


There are many ways to lose money. Take Mary Holmes, for example. Ms. Holmes was a 2015 Powerball lottery winner who won US$188 million, then quickly burned some of her winnings by releasing her boyfriend (drug dealer Lamarr “Hot Sauce” McDow) from jail – Many times. The bailouts cost him US$21 million.

Others lost money in more conventional ways, such as falling stock markets. As of this writing, the S&P 500 is down more than 18% year-to-date and the S&P/TSX is down more than 7%. The difference between losing money in the market and paying a friend’s bail is that the former can actually lead to creative planning ideas. Let me share seven ideas today.

1. Realize losses to recover the taxes paid. Take a look at the tax returns you filed for 2021, 2020, and 2019. Did you report capital gains on any of these returns? If so, and you currently have non-registered investments that have gone down in value, you may want to realize capital losses by selling some of your losers. You will be able to claim these losses when you file your tax return for 2022 and can carry the losses forward to 2021, 2020 or 2019 to recover any capital gains taxes you paid in those years.

2. Observe the superficial loss rule. If you are going to sell losers to realize capital losses, be aware that your losses could be denied if you sell investments at a loss but you, or someone affiliated with you (your spouse, for example), redeems the same securities. in the period that begins 30 days before and ends 30 days after your sale. But the loss does not go away forever. The denied loss is added to the adjusted cost base of the newly acquired securities, which will reduce a capital gain or increase a capital loss later when the investment is eventually sold.

3. Transfer capital losses to your spouse. If you have investments that have lost value, but you don’t have capital gains to cover the losses, you can transfer the unrealized capital losses to your spouse if they can use them. How? Step 1: Sell your losers in the open market. Step 2: Your spouse should redeem the same investment within 30 days. This will cause your loss to be disallowed under the superficial loss rule. Your spouse will have an adjusted cost base in the newly acquired investment which is increased by the loss denied to you. Step 3: Your spouse can then sell the investment and will realize a capital loss that they can use. Your spouse will have to wait until after the 30th day following step 1 before selling.

4. Consider an estate freeze. An estate freeze involves taking certain assets and “freezing” them at their current value. Future asset growth generally goes to your children or a family trust that you control. A freeze can cap your tax bill on death, among other benefits. The best time to freeze is when the assets are less valuable, so that more future growth is placed in the hands of children or a trust. A freeze does not mean having to relinquish control or use of assets or future growth. Talk to a tax professional.

5. Play dead when you see the bear. When you see a bear, how do you react? There’s an old saying that when you see a bear market, play dead. I’m talking about staying calm and not making any sudden movements. If you have a long-term investment horizon, you can expect markets to grow over time. Selling low and buying high again later is precisely a recipe for the erosion of wealth.

6. Take advantage of the purchase average. If you have cash on hand, is it time to invest it all in stocks? Well, if you had a crystal ball, you would find your answer. Author and hedge fund manager Ray Dalio wrote, “He who lives near the crystal ball will eat broken glass.” Rather than trying to guess when we hit the bottom of the market, consider the approach of systematically buying stocks over time, which allows you to average your cost amount over that period.

7. Use money to pay off your debts. When you pay off debt, you get a guaranteed rate of return equal to your after-tax interest expense on the debt. Who wouldn’t want a guaranteed return today when the markets are in decline? And the higher your interest charges, the higher your guaranteed return. If you have money in reserve, try to get rid of some of your debt.

Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is author, co-founder and CEO of Our Family Office Inc. He can be reached at [email protected].

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