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Discussion Starter #1
I'm carrying forward some net capital losses, which show up on my Notice of Assessment. In the past, I also contributed more to my RRSP than I had to take a deduction for. As a result, I have "Unused RRSP contributions previously reported and available to deduct".

Currently I have these two carry-forward resources available to me: the net capital loss, and RRSP contribution(s) from prior years.

In my 2019 tax return, playing with the tax software, I see that using any combination of the above resources brings me to $0 owing. I can wipe out my tax bill using entirely the RRSP or capital loss carry-forward.

This makes me wonder which I should use. Is one of these resources more valuable than the other? Should I try to preserve one of them, perhaps because it has more flexibility and usability in the future?

I hold non-registered investments (some with gains), and am also far from retirement age, so at first glance both types of carry forwards sound useful for the future.
 

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Your capital loss carry-forward would have been created using the 50% inclusion rate. The inclusion rates for capital gains and losses have changed over the years and there's talk of possible changes again to the rate (although I think it would be foolish of the government to do so). Either way, those loses may become more valuable if the inclusion rate is changed.

With respect to the unused RRSP contributions, I suppose their value would change each year as your income changed. They'd be more valuable in the years of high income and less so during low income years. You have said in the past that your income is somewhat erratic.

ltr
 

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Discussion Starter #3 (Edited)
Interesting, I had not thought about that inclusion rate impact.

Does anyone think the government could ever discontinue or start limiting capital loss carry-forward? Currently it's extremely flexible, and I wonder if that could change.

With respect to the unused RRSP contributions, I suppose their value would change each year as your income changed. They'd be more valuable in the years of high income and less so during low income years. You have said in the past that your income is somewhat erratic.
Yes, it's true that my income is volatile. I've tasted many of the tax brackets over the years.

My initial thought was, as you say, that the RRSP contributions are more valuable in years of high income. But it seems that the same is true of the capital loss carry-forward. Dollar for dollar, they have the same impact on my tax return (at least this year).

Once I saw this dollar for dollar equivalance, I started wondering if I should try conserving one of them versus the other.
 

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Does anyone think the government could ever discontinue or start limiting capital loss carry-forward? Currently it's extremely flexible, and I wonder if that could change.
Nope, that won't happen.

My initial thought was, as you say, that the RRSP contributions are more valuable in years of high income. But it seems that the same is true of the capital loss carry-forward. Dollar for dollar, they have the same impact on my tax return (at least this year).
Yep, I agree today they are probably equivalent.

But the future inclusion rate is an unknown and the RRSP is not, so myself I would go with the RRSP.

ltr
 

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My .02 . The cap losses you can only use against cap gains. The unused RRSP deduction you can use against any type of income.

So when you have a cap gain you may want to use the loss carry forward first . Sooner is better for time value of $.
 

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Discussion Starter #6
Interesting thoughts. Thanks to both of you!

And Jimmy you're right, I forgot that point that cap losses can only be used against gains.
 

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Lastly, there is likely a general misunderstanding about inclusion rates on cap gains too. If they change it, the 50% will most likely still apply to gains accrued up to the date of change. One may need to establish FMV of their holdings as of the date of change so that previous gains are taxed at 50% inclusion rate, and forward gains at the new rate. Whatever happens, the date of change will most likely be Budget Day, the day of announcement to avoid market effects.

That is what happened on Feb 22, 1994 when $100k lifetime cap gains exemption was taken away (with up to $100k of grandfathering for a period of 10 years I believe). I remember carrying an exclusion balance on my holdings for a number of years thereafter until I used it up. Something similar could be orchestrated if/when inclusion rate changes.

Added: Whatever the case, I'd preferentially use the carryforward cap losses first in case there is any 'funny stuff' Mr Morneau might apply. I doubt the gov't will ever change RRSP contribution/deduction rules materially. They are tied too closely to DB pension equivalents.
 

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Discussion Starter #8
This is a really good point, about complications from the "funny stuff" that could be coming. Maybe I'll try to use some cap loss for my current tax filing, since I do have cap gains in 2019.
 

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I wouldn't reduce your taxable income any lower than just at the top of the first bracket though. You are losing too much by using tax losses in the federal 15% bracket. I always try to manage use of tax losses depending on my MTR in any given year.
 

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Discussion Starter #10
Thanks, good point AltaRed. I've now got it so that the Taxable Income after the deductions lands in the 20.5% bracket.

The 15% bracket is taxable income < 47,630
And the 20.5% bracket is > 47,630 but < 95,259 taxable income

I want to make sure I understand your point...

Here's a hypothetical scenario: say I have a huge amount of excess carry-forwards available (or can make RRSP contributions) and could reduce my Taxable Income to any arbitrary amount. I start with 50,000 taxable income before using any of the deductions. Currently that's into the 20.5% bracket.

Are you saying it only makes sense to use up to 2,370 of deductions, bringing taxable income down to 47,630? And it is not worthwhile using any more deductions beyond that point?
 

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That's the way I look at it. The deductions are more valuable until you get to that $47630, then you may as well save them for the next year.

ltr
 

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Here's a hypothetical scenario: say I have a huge amount of excess carry-forwards available (or can make RRSP contributions) and could reduce my Taxable Income to any arbitrary amount. I start with 50,000 taxable income before using any of the deductions. Currently that's into the 20.5% bracket.

Are you saying it only makes sense to use up to 2,370 of deductions, bringing taxable income down to 47,630? And it is not worthwhile using any more deductions beyond that point?
Correct. I wouldn't waste good tax deductions in the 15% bracket at all. Getting at least 33% less tax leverage there for every $ of deduction than you do in the 20.5% bracket.
 

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Strategically using tax deductions to reduce the next MTR of 26% (never mind the provincial rate) as much as possible is even more compelling. Especially useful for the self-employed/sole proprietors with lumpy income from year to year.
 
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