Part 1:

You’re a well-respected financial planning group, based in Toronto, Ontario. Your two largest clients, who are permanent Canadian residents, Mr. and Mrs. Laff, are personally afflicted by the events happening in Ukraine. They come to you wanting to divest from Russian exposure to the greatest extent possible in their individual non-registered portfolios— specifically their emerging markets funds, which are currently in an unrealized loss position (combined, ACB: $1,000,000, FMV: $720,000).

They have read up on a strategy called tax-loss harvesting and think that’s a good idea for them, seeing as how they previously triggered capital gains a couple years back. With this in mind, they want to realize their capital loss for tax purposes, then immediately use the proceeds from their Global Emerging Markets Fund to put into a new investment, the Dynamic Emerging Markets Fund.

After conducting some research, you have a high degree of confidence that their claim to capital losses will be disallowed and that their ACB in the new investment will be impacted. Because of this, you have arranged a meeting to discuss these findings.

Note: your answers should contain Canadian-only content. Any non-Canadian reference offered in this assignment that supports your response to any question asked will result in a deduction of 1 point per reference, with no limit. It is your responsibility to ensure that you are speaking to facts that pertain to Canada’s Income Tax Act, only.

a) In your own words, what is tax-loss harvesting?

b) What is tax-loss harvesting also known as?

c) Which specific rule will prevent the Laff’s from claiming a capital loss?

d) Describe it using your own words.

e) What will be their new ACB as a result of their denied capital loss? Show your work.

f) How might you advise the Laff’s so they can successfully claim their capital losses?