We get it. Some people love podcasts they can travel with during their daily commutes. Others of you prefer your learning accompanied by charts, graphs and handy hyperlinks.
At PWL, we aim to please all sorts! That’s why my new series on tax-loss selling comes in three flavors: a delicious podcast version, a video version (below), as well as this savory multi-part series of blog posts.
So, without further ado, let’s dive into the subject of tax-loss selling – a strategy investors can use to defer taxes on their taxable capital gains.
Making a Killing in the Market
Picture this. You’ve finally made the plunge into index investing. Things are going pretty well … until markets take a nosedive, as they periodically do.
You know you shouldn’t, but you can’t help yourself: You begin stalking your accounts with hourly logins, haunted by the red losses piling up like murder victims. You start to second-guess your entire strategy. Your anxiety is aided and abetted by the popular press, telling you the 60/40 stock/bond portfolio is dead, and suggesting that passive investing is the culprit.
All of this is nonsense, of course. The truth is, you’ve made a great decision to switch to low-cost index investing. Downturns happen. When they arrive on the scene, your best bet is to chill, until they pass.
However, holding tight doesn’t necessarily mean doing nothing. Taking a more active tax management approach can make sense for even the most passive indexing purists.
Winning by Losing
This is where tax-loss selling comes in handy. No one likes losing money on an investment. But sometimes, realizing capital losses can enhance your bottom line by reducing your tax bill while you patiently wait for markets to recover. Because you will be patient, right?
Tax-loss selling – also known as tax-loss harvesting – is a technique for realizing, or crystallizing, capital losses in your non-registered accounts so they can be used to offset taxable capital gains.
To be clear, there is no benefit to tax-loss selling in your TFSA or RRSP. This entire conversation only applies to your non-registered accounts, where deferring capital gains taxes can give your money more time to grow.
Tax-Loss Selling Made Crystal Clear
As an example, suppose you invest $100,000 in a Canadian equity ETF, and then the value declines to $90,000. By selling your shares, you can crystallize a capital loss of $10,000, and potentially use that loss to offset a $10,000 capital gain elsewhere in your portfolio. By deferring thousands of dollars in taxes, there’s more left in your portfolio to compound over time.
Tax-loss selling may sound like the cardinal sin of “selling low,” but we’ll explain in a moment why, when properly executed, that’s not the case.
Before engaging in tax-loss selling, it is important to ensure your tax strategy is based on accurate information. It is your responsibility (not your brokerage’s) to ensure your adjusted cost base (ACB) is accurate and up-to-date. This includes making adjustments for buys, sells, DRIPs, return of capital, reinvested distributions and unit splits. For more details on how to track your adjusted cost base, please feel free to download our white paper, As Easy as ACB.
When you file your tax return, any capital losses must first be used to offset capital gains you’ve incurred in the current tax year. Any remaining losses can be carried back for up to 3 years, or carried forward indefinitely to offset future capital gains. (To carry back current capital losses to prior years, you need to file form T1A – Request For Loss Carryback with your return.)
When Is It OK To “Sell Low”?
Back to that “selling low” conundrum. You may be wondering if it’s wise to realize a capital loss by selling a security that plays an important role in your portfolio.
If you’re holding individual stocks, it probably isn’t very wise. Say, for example, your Royal Bank shares are down in value, and you sell them to capture the capital loss. What if you then end up missing a big upward move in that stock?
To harvest the loss but not lose your position, you might figure you’ll just turn around and buy back more Royal Bank shares at the new, low price.
Nice try. But the Canada Revenue Agency (CRA) would declare your sale a superficial loss, and you wouldn’t be able to use it to offset gains. This is why investors who buy individual stocks have limited opportunity for tax-loss selling. And it’s yet another way ETF investors have an advantage. By following the techniques in this series of blog posts, you can systematically harvest capital losses, maintain constant exposure to all the asset classes in your portfolio, and comply with CRA rules.
The Superficial Loss Rule, in Two-Part Harmony
So, again, the CRA does not allow you to sell a security to crystallize a loss, immediately buy it back, and continue to hold it. If you do that, your claim will be denied as a superficial loss.
Bottom line, the CRA doesn’t think much of you playing shell games with your taxable holdings, so they require you to abide by a two-part superficial loss rule. And by the way, “you” includes people affiliated with you, which includes your spouse or a corporation controlled by either of you.
Whoever you are, you …
A. cannot buy, or have the right to buy, the same or identical property, during the period starting 30 calendar days before the sale, and ending 30 calendar days after the sale; and
B. cannot still own or have the right to buy, the same or identical property 30 calendar days after the sale.
In part A of this rule, the period spans 61 days: the settlement date of the sale, plus the 30 calendar days before and the 30 calendar days after the settlement date. Part B sounds redundant, but there’s an important subtlety. You can buy the identical security any time during the 61-day period, but you must ensure you don’t still own it by the end of the period. If you do, the loss will be denied and added back to the adjusted cost base of the identical security.
The 61-day period includes the settlement date of the sale as well as the 30 calendar days before and after the settlement date. We suggest first using your computer’s calendar to determine the settlement date of the sale. For an ETF, this is T+2, or two business days after the initial trade. When determining settlement dates, skip over any weekends or holidays when the Canadian stock markets are closed.
Next, count backward and forward 30 days starting at the settlement date (I’m not ashamed to admit, I count the days out loud like a first grader when determining the 61-day period). Ensure all purchases of the identical security settle outside of this 61-day period (unless you plan on selling the shares before the end of the 61-day period).
Similar vs. Identical Property
The good news for ETF investors is that you can avoid the superficial loss rule while still maintaining exposure to the same asset class by using similar, but slightly different holdings.
Remember, the superficial loss rule only applies if you sell and then repurchase the same security or an identical property. In 2001, the CRA issued a bulletin stating that two index funds tracking the same benchmark are considered identical property.
For example, according to this interpretation, you cannot sell the iShares Core S&P/TSX Capped Composite Index ETF (XIC) and replace it with the BMO S&P/TSX Capped Composite Index ETF (ZCN), as they both track the S&P/TSX Capped Composite Index.
Other less obvious examples of identical property would include the Mackenzie Canadian Equity Index ETF (QCN) and the TD Canadian Equity Index ETF (TTP), which both now track the Solactive Canada Broad Market Index. Vanguard, BMO and iShares all have funds tracking the S&P 500 Index, and these would also be considered identical property according to the CRA.
However, it is possible to find pairs of ETFs in the same asset class that are similar, but track different indexes. By selling your existing ETF and repurchasing a similar – but not identical property – you can realize a capital loss and still maintain similar diversification in your portfolio.
Identifying acceptable pairings can be time-consuming. In a separate post in this series, we’ll provide suggested ETF pairings for your consideration. Here, we’ll cover some additional details to bear in mind first.
Performance Considerations for Your Replacement ETF
As your replacement ETF is a similar, but not identical holding to your original ETF, it’s unlikely the pairs’ performances will be the same over the 30-day period.
For example, say you took a much-needed break from your in-laws on Christmas Eve 2018, to check on your portfolio. Yikes, you discover your $100,000 holding of the Vanguard FTSE Canada All Cap Index ETF (VCN) has dropped to $84,000! You sell all units of VCN and use the proceeds to buy the iShares Core S&P/TSX Capped Composite Index ETF (XIC), realizing a $16,000 loss in the process. After 30 days have passed, you sell your XIC holdings and repurchase VCN.
During this 30-day period, the replacement ETF happened to outperform the original ETF by about 0.15%, including dividends. This doesn’t seem like much, but on an $84,000 holding, it means you scored an extra $122 from your tax-loss selling round trip.
This is an ideal result, but things don’t always work out so well. There’s also a risk the replacement ETF will underperform the original ETF during the 30 calendar days after the switch.
If properly selected, your tax-loss selling pairs should have minimal tracking error, with minimal performance differences between them. This low tracking error is also a good reason to consider holding onto the replacement ETF, instead of switching back to your original ETF after 30 days. If both ETFs are expected to perform similarly going forward, and there’s no way to determine which will slightly outperform the other over your investment horizon, you’re really just flipping a coin at this point.
Partial Superficial Losses
It’s also possible to trigger a partial superficial loss, whereby only a portion of the capital loss is denied. This would occur if you or yours (as previously defined) buy back fewer shares of the identical property during the 61-day holding period, and you are still holding these shares at the end of the period.
This can easily occur when a tax-loss selling trade is made at year-end. When January arrives, investors and their spouses are busy making their TFSA contributions, simply topping up whichever asset class is down in value. This is often the same security they sold in December to realize a capital loss.
For example: You purchase 3,000 shares of VCN in 2018 for $100,000. On December 24 you sell all 3,000 shares for $84,000, resulting in a capital loss of $16,000. You immediately purchase XIC with the proceeds.
On January 9 of the following year (which is within the 61-day period), your spouse makes a TFSA contribution and buys 300 shares of VCN (which is the same security you just sold at a loss in December). Your spouse continues to hold these shares until after the 61-day period ends on January 27, 2019. Whoops! As your spouse purchased back 300 of the 3,000 shares you had initially sold, 10% of your $16,000 loss will be denied. This will result in a partial superficial loss of $1,600, reducing your actual $16,000 loss to $14,400.
Some spouses prefer to keep their finances separate, but this example illustrates the need for spouses to coordinate their investment strategies, especially when tax-loss selling.
Dividend Reinvestment Plans (DRIPs)
Enrolling in a dividend reinvestment plan (or DRIP) program through your brokerage account is also a surefire way to realize partial superficial losses. If you (or your spouse) have a DRIP set up on the same ETF that you decide to sell for tax purposes in your non-registered account, a portion of the loss may not be allowed. This is why we advise against using DRIPs when implementing a tax-loss selling strategy.
Continuing with our example, suppose your spouse also owns 3,000 shares of VCN in a TFSA that he or she purchased outside the 61-day window. In January 2019, your spouse receives a dividend from the fund, most of which is used to automatically purchase 20 additional shares of VCN. If these 20 shares are not sold by the end of the 61-day period, you’ve just triggered another partial superficial loss.
Multiple Portfolio Managers
Multiple portfolio managers can also cause unintended superficial losses. Some investors feel that using more than one manager offers some diversification benefit. The problem is, it can cause major headaches when it comes to avoiding superficial losses. If one of the managers sells a security to realize a loss, there is no way for them to know whether another manager is buying shares of the same security during the 61-day period.
Next Up: When Should You Sell Your Losers?
Okay, so we’ve now covered several important ways to avoid taking superficial losses as part of your tax-loss selling strategy. These include: keeping an eye on buying and selling similar, but not identical ETFs; avoiding partial superficial loss traps; and skipping DRIP programs as well as multiple portfolio managers. In our next post, we’ll continue the conversation by covering the tactics on when and how to apply tax-loss selling to begin with.
Special announcement: In the next CPM podcast, I’ll be discussing foreign withholding taxes. If you’d like to be featured on the episode, please record your question and email it to me (and if I can’t fit your question into the podcast, I’ll still provide you with an answer by email). I will also be including a new segment called Portfolio Improvement, so if you need some guidance on foreign withholding taxes in your own portfolio, please feel free to drop me a line.
Thanks everyone! :)
Hi Justin,
If you are investing monthly over a multi-year horizon, at some point you will hit a stage where it is unlikely that you’ll experience a capital loss based on your ACB or book value. A sufficient portion of your shares were purchased long enough ago that even a significant downturn does not trigger a capital loss. I imagine at this point tax loss harvesting is not even an option. Is there any way to avoid this?
Hi Justin,
I appreciate all your advice. Can you let me know if tax loss selling has the same benefits in a corporate account as a personal non registered account. If I have capital gains in a fiscal year, will capital losses from tax loss selling offset the gain the same way with the same benefits?
Thanks
@Bob – Capital losses can offset capital gains in corporate accounts, but there may be reasons to not offset these gains (or at least to pay out a tax-free dividend from the CDA balance prior to doing so). I’d suggest speaking to your accountant before initiating any tax-loss selling strategy in your corporate investment account.
Hey Justin. In a corporate investing account I am interested in converting strategies from a XAW/VCN mix to XUU/VCN/XEC (don’t ask ;)…..asset allocation and location within all accounts is figured out for weighted global diversity, tax efficiency, low MER and risk).
Question: Do you see any issues with tax loss harvesting in a sell of ALL my XAW and buying XUU and XEC. I see underlying XAW holdings of IVV, ITOT, IJH, IJR, IEMG?
Thank you kindly
@Bard – I don’t see a huge issue with this strategy, but to be safe, you could sell XAW and buy VUN and VEE instead.
Hi, I was wondering if you could describe if this applies to shorting a stock also. If I am short xyz, then buy it to close out my position and realize a loss, then short it again the same day, does that count as a superficial loss since I don’t own it?
2nd question. Would 2 different ETF’s that own physical gold bullion count as identical property?
Thanks,
Mike
@Mike – I’ve never shorted a stock, so unfortunately, I am not familiar with the superficial loss rules in this case. You might find the answer here though:
https://www.financialwisdomforum.org/forum/viewtopic.php?t=119085
The gold bullion question is a bit of a grey area. If they follow the same index (like the LMBA gold price index), they could be deemed identical property. But if the ETFs had very different fees, or had other subtle differences, you may have an argument for considering them to be sufficiently different. I probably wouldn’t risk it though – I would assume they are identical.
Hey there,
I’m assuming the USD and CAD version of stocks or ETF’s would trigger a superficial loss, correct?
Example 1: Sell BPY.UN on the TSX, and then buy it BPY on the NYSE
Example 2: Sell iShares S&P 500 ETF on the TSX, buy a Vanguard S&P 500 ETF
Thank you :)
@tomas: Correct – if they are the same security, or follow the same index, they are generally considered identical property.
Hey Justin,
Let’s say I fully sell a position and realize a capital gain because I’m predicting that the price of a stock will have a big decline. I then buy back into it about 4-5 days after the price has indeed dropped and then a few months later the price has continued to drop (woops). I then accept defeat and sell the entire position for good (with no plan of rebuying back into it again), meaning the first full sale was a capital gain, but the second full sale was a capital loss. In this scenario, does the superficial loss rule apply, or is my second full sale (capital loss) able to offset the capital gains from the first full sale?
Clearing this up for me would be greatly appreciated! Thanks!
@Mark – I don’t believe this would be a superficial loss.
Question: I hold VCN in my TFSA, RRSP, and taxable account and my spouse also holds VCN in their TFSA. Can I replace VCN with XIC in just my taxable account or do I need to sell it is all the other accounts too to avoid superficial loss?
@PC – if either of you have purchased shares of VCN during the 61-day period in any of the accounts, those units will need to be sold to avoid a superficial loss.
Thanks! So just to double check, it’s OK to OWN VCN in other accounts, as long as we don’t BUY VCN within the 61-day period. The way it’s worded on the CRA site is confusing.
Also, I think XIC is still a suitable replacement for VCN which is what I’m thinking to buy. Your part 4 lists some other ETFs as well. Do you have a favourite?
@PC – That’s correct! So both of CRA’s superficial loss rules must be satisfied to deny the loss (i.e. you have to buy shares of the identical property within the 61-day period and still own them at the end of the 61-day period).
XIC is still a decent replacement for VCN. I’ve also been using FLCD in my client accounts as a decent tax-loss selling pair for either XIC or VCN:
https://canadianportfoliomanagerblog.com/part-4-which-etf-pairs-should-i-use-when-tax-loss-selling/
Just to clarify..if I sold 1000 BNS shares on Oct 7 and wait until Nov 9 to buy them back , I should be good…What happens when I receive the dividend and have shares repurchased at the end of Oct. Does this affect anything? Thanks
@Steve – Correct! If you sold BNS on October 7, 2020, it would settle on October 9, 2020. After 30 calendar days have passed (after November 8, 2020), you can buy back your BNS shares.
If you received a dividend from BNS which was automatically reinvested in more shares of BNS at the end of October, you’ve triggered a partial superficial loss, unless you sell those shares by the end of the 61-day period (Tip: Cancel all DRIPs if you’re implementing a tax-loss selling strategy).
Hey Justin,
Great series of articles, they are super helpful! I’m just a little confused about the 61 day period which covers 30 days *before* the settlement date. If I invest a portion of my paycheque on the 1st day of every month, does that mean I can’t properly harvest tax loss ever without incurring superficial losses?
Here’s an example:
Mar 1st: buy 100 shares of X
Apr 1st: buy 100 shares of X
May 1st: buy 100 shares of X
May 25th: tax loss harvesting opportunity. Sell 300 shares of X and buy Y. Let’s say the total capital loss is $5000.
Is it correct that 1/3 of the $5000 becomes superficial and gets denied?
You mentioned that tax loss harvesting is only worth it when the loss is more than 5% and $5000. In this case since I only effectively lost 2/3 of $5000, so is it not worth it then? I also find that calculating if I lost 5% is difficult when superficial loss is considered.
Thanks for the reply, but I just gave the 2 rules another read and I’m confused again :(
If those 300 shares of X sold are all I had, and starting June 1st I exclusively buy Y, meaning I don’t own any shares of X at the end of the 61 day period. Then am I good?
But then, if I still own X in my TFSA account, then would that violate the 2nd rule?
@Steven – Haha, nope, I’m the one who is confused! You’re right – if you sell all 300 shares and don’t repurchase them before the end of the 61-day period, you’re free and clear.
If you bought any shares of X in your TFSA during the 61-day period, you would need to ensure you sell those shares by the end of the 61-day period.
Sorry again for the confusion :)
Thank you for the clarification! My last question wasn’t about trading in TFSA though. What if I just own X in my TFSA without trading it for the whole year? It seems I would still satisfy both rules. I traded within the period (bought 100 shares on May 1st), and I own some shares at the end of the period in TFSA, even though I didn’t touch them.
@Steven – If you don’t buy any X shares in the TFSA during the 61-day period, you don’t need to sell any existing X shares in the TFSA to avoid the superficial loss rules on the sale of X in your non-registered account.
Interesting examples. In my situation I am looking to crystalize loses in a few bank stocks by selling before end of year, but my plan was to purchase an ETF (BMO ZEB) which has a portfolio of banks some included in what I am selling. This seems like it could raise a red flag if i later sold the ETF and entered positions in specific banks after the 30 day period ?
@Mike: The CRA has made it clear that an investor can sell an ETF tracking the S&P/TSX 60 Index and purchase an ETF tracking the S&P/TSX Capped Composite Index (which includes all of the stocks tracked by the S&P/TSX 60 Index, plus another ~160 mid and small cap companies).
I see your situation as very similar. Sure, ZEB may hold all of the individual stocks you just sold, but each individual stock and ZEB are absolutely not identical securities.
Hi Justin,
One thing that has not been clear to me is whether you can claim a capital loss if you buy and sell something within 30 days. Let’s say I buy a stock and the market immediately crashes. I sell ALL of the stock a few days after the purchase to cut my losses. This would seemingly violate: “cannot buy, or have the right to buy, the same or identical property, during the period starting 30 calendar days before the sale, and ending 30 calendar days after the sale” because I purchased it in the 30 days prior to sale date.
Do I have to wait at least 30 days with a stock before selling to claim capital loss?
Thanks!
@Tom: Part B of the superficial loss rule would be relevant in this example. As you don’t still own the security at the end of the 61-day period, the loss will not be denied (you have to break both rules before the superficial loss rules kick in).
Hello Justin
I have a RRSP and a Non Registered account. I sold a stock in the non registered account and left the cash there. A couple days later I purchased the same stock in the RRSP with funds that were already in there.I did not consider the Superficial Loss Rule. The stock was sold at a loss. Can the loss be claimed as there was no transfer of funds between the accounts with intention of bypassing the rules. What is the procedure when I fille taxes this year.Thanks in advance.
@Nigel: You have created a superficial loss, and cannot include the loss on your tax return (this assumes you did not sell the stock in the RRSP before the end of 61-day period).
Hey Justin,
Given the second part of the superficial loss rule…
“You, or a person affiliated with you, still owns, or has a right to buy, the substituted property 30 calendar days after the sale.”
…could you, sell a specific stock (let’s say RY) to capture a tax loss and then buy it back the next day. You could then hold it until the day before the 30 day period ends and sell it again. This would satisfy the second part of the superficial loss rule. Now once outside the superficial loss window, you could safely repurchase the specific stock having tracked it accurately (minus trading costs) over that entire 30 day period.
Would this be allowed?
Thanks for the information! This was a great post.
@Jeff: I can’t really comment on how CRA would view this type of transaction (I think you’re getting into a grey tax area now). However, if you sold it the second time at a loss (not a gain), you would just restart the process.
Hi Justin,
Thanks a lot for the article, and thank you so much for answering so many questions in the comments! I have a slight variation that I think you partially answered, but I wanted to get confirmation.
Let’s say I have 100 shares of XIC in my TFSA and 50 shares in an unregistered account. I purchase 50 additional shares of XIC today, and then two weeks from now I sell all 100 shares in order to realize a capital loss. Because I bought 50 shares in my unregistered account within the 61-day window, does that mean I would have to sell an additional 50 shares in my TFSA in order to avoid a partial superficial loss? I assume the answer is yes, but I wasn’t positive since the 50 shares purchased would be part of the sale.
Thanks again for all your time!
@Ryan: You’re very welcome!
As long as you sold all 100 shares of XIC in your non-registered account (and didn’t buy any shares of XIC in your TFSA or any other accounts during the 61-day period that you still own at the end of the 61-day period), there will be no superficial loss. Remember, you need to have bought, and still own the shares at the end of the 61-day period. Although you bought 50 additional shares in the non-registered account, you did not still own them at the end of the 61-day period.
Justin, if I sold some, but not all, of my bond ETF (ZDB) at a loss, can I still claim it as a capital loss? Not sure if I’m understanding correctly, but I believe that the answer is no, since I still own some of the shares of ZDB.
Is an asset allocation ETF like VEQT considered tangibly different enough from more specific ETF’s? Or would they consider it to hold, say, VCN? e.g. could you sell individual ETF’s like VCN then buy an asset allocation ETF like VEQT and be able to claim the loss?
@Brent Thoma: I wouldn’t expect this to be an issue.
Do you know if asset allocation ETFs are considered identical property? For example, would VEQT/XEQT or VGRO/XGRO be considered so? The allocations are not exactly the same.
Thanks a lot.
@Sébastien Desforges: These ETF pairs would generally not be considered identical property (as they do not follow the same index).
This series came out at the perfect time with the current market drop (crash?). I have a few opportunities for tax loss harvesting, but I’m not entirely sure I understood the CRA rule. So let’s go with an example.
Suppose I started 12 months ago with zero shares of, say, VCN. I bought 100 shares/month, so I’m now sitting with 1200 shares. Similarly, my spouse started with zero, but bought only 50/month, so she has 600.
If I sold my 1200 shares, then only 1150 would be eligible, due to the 50 my spouse bought early this month (rule A). If she were to sell her 600 shares in the next 30 days (rule B), though, then not only all my 1200 shares would be eligible, but all hers 600 would be eligible as well.
In a different scenario, my spouse did not buy any shares except in the last month. So she only has a total of 50, and due to transaction costs she should not sell. In that case, does it matter if I sell the 1200 and get a partial loss bringing it down to 1150 or should I only sell the 1150? I’m in doubt if the CRA would say that out of my 1150 we would have to deduct her 50, bringing it down to 1100. Naturally, selling the 1200 makes it easier to manage going forward, as I would not have a small position on that share going forward.
@Sean: Your understanding in Scenario 1 is correct. In the second scenario, let’s assume the total loss on your 1,200 shares of VCN is $12,000. If you sold all 1,200 of your shares of VCN, the denied loss would be $500 (50 / 1,200 x $12,000). And if you sold just 1,150 of your shares (realizing a loss of $11,500), the denied loss would still be $500 (50 / 1,150 x $11,500).
They’ve thought of everything ;)
Hi Justin, A followup question to my previous one on your podcast post.
I’d like to ask it by presenting a scenario.
One holds XIC across TFSA/RRSP/Taxable .
Jan 1 – regular contribution to buy let say 10 shares of XIC in TFSA
Jan 15 – regular contribution for 10 shares in RRSP
Jan 25 – XIC is now taken a 20% drop and you decide its a good day to harvest some loss. After T+2 Jan 27 becomes your 30 day back and forward date.
So anytime BEFORE March 30(First business day from the 30 day forward settlement date one must have:
1.sold 10 shares in TFSA,
2.sold 10 Shares in RRSP
3. Converted any regular contributions to the new ETF (ie VCN) in all accounts.
Once March 30th passes you can then choose to continue holding VCN in your taxable account or move back to XIC… but in your TFSA and RRSP you can convert back any shares in VCN that were purchased in the 61 day window to XIC as that was always the primary holding.
Is this a correct example for people that implement your model portfolios across all 3 account types?
Sorry Let me make 2 corrections:
I messed up the date… literally when Justin says use the calendar and count it out… DO that
Replace March 30th with FEB 27th.
Also, after listening again you’d be replacing XIC with FLCD not VCN.
@Kosta: In order to avoid a partial superficial loss, you would need to sell the 10 shares of XIC purchased in both your TFSA and RRSP before the end of the 61 day period (which would be around the end of February. You could also consider just accepting the superficial loss if the cost to fix it (i.e. trading commissions and bid-ask spreads) will offset any benefit gained from the small additional loss.
Justin,
It is sometimes confusing for me whether we need to use the trade date or the settlement date. Here’s my real example. I sold CM to take a loss for the year on Dec 27 and in my brokerage account it says settlement date Dec 31. Ex-date for CM was Dec 24 so I should have captured one last dividend. I immediately on the 27th bought TD. Again, settlement date in my brokerage account says Dec 31. TD goes ex-dividend on Jan 9. Here’s my dilemma… on what date can I sell TD? I would like to buy BMO before the Jan 31 ex-dividend date. In other words I want to sell the TD shares and buy BMO. Is my 30 days from Dec 27 or the 31st? Does this even matter? This way over the course of a month I basically pick up 3 dividends. CM will not go ex again before March 27 so I would then be beyond the 30 days on the CM shares to qualify for tax loss harvesting and could buy it back. I figure this is a good strategy to pick up income and stay in parallel investments. Your comments please.
Thanks, Andy
@Andy: You can sell TD whenever you’d like and buy BMO (you just can’t buy-back CM until at least January 29, 2020 – as the trade will settle on January 31 – one day after the 30-day period ends).
Tax-loss selling using the big banks is not ideal, as the performance differences during the thirty days can be significant (and may offset any tax benefits of the strategy).
If the replacement ETF outperforms the original after a tax-loss sale, it might make sense to not switch back after 30 days. What if the replacement underperforms the original?
@James V: The replacement ETF will either outperform or underperform the original over the 30 days (and also over your investment horizon). This is why I suggest ETF pairings that are basically identical, so you don’t need to switch back after 30 days (as the expected returns going forward will be similar, and you don’t know whether it’s even a good choice to switch back to your original ETF after 30 days). Even if your new ETF slightly underperforms over 30 days, it may outperform over your entire investment horizon.
So in other words, don’t sweat the tracking error if you have carefully chosen ETF pairings.
Hello Justin,
In you example above, you sell all the shares of VCN realizing a $16,000 loss, buy XIC and hold for 30 days, make $120ish dollars, sell it and buy back VCN.
Assuming you had a 1000 shares of VCN and which was previously purchased at $100/share, it went down to $84/share so you bail out, book a $16,000 capital loss. 30 days later you buy it back again and let assume it’s at $84/share again.You hold it for a few years and it’s gets back to $100 share. The capital gains offset the capital loss, so what was the point of doing this?
Or pretend you buy XIC and just end up holding it for a few years and it gains in value by $16,000 which again offsets the capital loss. Again what was the point of this?
I don’t follow the logic of tax loss selling unless if you are are using capital losses strategically to offset capital gains when you are the marginal rates are higher during certain times of your life?
If you are doing tax loss selling and then waiting the required amount of time and re-buying into your RRSP, LIRA,
TSFA, that makes complete sense to me.
RK
@Rahim: The capital loss is used to offset other capital gains realized in your portfolio (the benefit is the tax deferral on the funds that would have normally been used to pay taxes). Assuming an after-tax return on the portfolio of 4% (and the highest marginal tax rate in Ontario), if you realize a $16,000 gain in your portfolio, you would pay taxes of $4,282 ($16,000 x 50% x 53.53%). If that amount were still in your portfolio earning 4% after-tax, you would have an additional $171 per year ($4,282 x 4%). This annual $171 amount is the benefit from tax loss selling.
As you also mentioned, there could be another tax benefit if you could manage to offset the gain with a loss in a high tax year, and instead realize the gain in a lower tax year at some point in the future.
Hello Justin,
Thank you for your response. It makes sense now. At a high level you are deferring your capital gain taxes to a later date and by doing so you have more investment capital working for you. The capital loss that you booked is your Trump card and you can choose when to play it strategically.
Thanks, RK
@Rahim K: You got it! ;)
Hi Justin,
Just wondering what you think. I am 30 years old and one of those FIRE people; I plan to leave my job within the next couple years. I plan on living very modestly, doing volunteer work in low cost countries which provide food and shelter. I plan on using a very low withdrawal rate of around 2% so that my money will still grow and provide me more security and luxury as I get older, as opposed to the traditional method of spending less when your older. This being the case, I think its smarter to do tax GAIN selling. I will be well below the basic personal amount and I think its the best way to take full advantage, having a 0% average tax rate now, while reducing my future tax burden. As far as I’m aware, there are no superficial tax gain harvesting rules, so I could just sell and immediately buy back the securities. I could do this at the end of each year in December after factoring in dividends. What do you think of this strategy?
@Matt: Tax gain harvesting can make sense in personal accounts (as well as corporate accounts), depending on the investor’s specific situation. I would recommend speaking with a fee-only planner to help you decide whether it’s appropriate for you.
I’d like to sell shares in ZPR (BMO Laddered Preferred Share Index ETF) for a tax loss and am looking for an acceptable pairing. Would CPD work? ZPR tracks the Solactive Laddered Canadian Preferred Share Index. CPD tracks the S&P/TSX Preferred Share Index. Thanks.
@James V: The monthly tracking error between ZPR and CPD’s underlying indexes is relatively high, at 0.865% (between 2013 and 2018). This means they’re not ideal tax-loss selling candidates (and not great substitutes for one another), so you would be taking more tracking error risk over the 30-day holding period.
Have you ever witnessed a small, tax free transaction (eg DRIP or TFSA contribution/investment) result in a capital loss adjustment per your example? It totally aligns with the rules and obviously it’s best to plan within them. But, identifying the issue / enforcement via auditing securities transactions in numerous accounts seems like a task for only the audits of the largest capital loss/tax saving outcomes. Or maybe CRA has a slick system for monitoring?
I just have never witnessed a loss being adjusted for that reason. Either way, a good point to be aware of which could save hassle and expense.
Great podcast thus far!
Thanks,
Jordan
@Jordan Kenna: Capital loss adjustments due to superficial losses are generally made by the client/their brokerage/their accountant when they notice the error (I don’t believe CRA’s systems are that clever…yet). Perhaps in a full audit, the CRA may catch a superficial loss, and adjust the taxpayer’s return accordingly.
Glad you’re enjoying the podcast – thanks for taking the time to listen (or at least for listening to the last 5 minutes ;)
B. cannot still own…..the same….property 30 calendar days after the sale.
Just to be sure I understand this, Can I not do a partial sale and keep half of my total stock shares?
@Nestor Tabora: As long as you didn’t/don’t buy any shares in that account (or other accounts) within the 61-day period, you can sell a portion of the holdings in your taxable account (although you would generally want to sell all shares in the taxable account to realize the full capital loss).
Question,
Let’s say I invested 100,000 in VEQT in Feb 2019 and my non-registered portfolio is up an amazing 20% to 120,000.
Now, let’s assume that in Dec 2019 the market goes through a short 20% market correction and my portfolio drops back to 100,000 again.
In this situation, you couldn’t use tax-loss selling to buy XEQT as there’s no loss?
I suppose that the longer you hold your portfolio the more likely your portfolio will be up in value and less opportunity to use tax-loss selling.
Are my assumptions correct?
@Guy Langevin: You are correct! However, if your existing holdings have large unrealized capital gains, you could consider buying different ETFs for any new purchases (these newer holdings would then have high cost bases relative to their market values, increasing the likelihood of more tax-loss selling opportunities.
@Guy Langevin, a 20% loss from your 120k holding would not drop you back to even but rather to a 4k loss.
In the event of a major equity correction of 50%, followed by a 50% rise, you’ve only recovered half of your loss. You’d need a 100% rise to get back to even.
Unfortunately in Canada we must use ACB to determine capital gains and losses, rather than designating tax lots as is the case south of the border. By buying a different ETF as Justin suggested, an investor is essentially creating a new tax lot in the new ETF rather than accumulating in a product which, due to considerable considerable accumulated capital gains, has no hope of generating tax loss harvesting opportunities.
Re Tax loss Selling: Would it not be easier? simpler ? to buy the replacement ETF the day before the sell? Even on Margin?
@Gordon Taylor: You would want to buy the replacement ETF at the same time you sell the original ETF at a loss (so that you maintain the same exposure). If you buy the replacement ETF the day before you sell the original ETF, you’ll double-up your exposure for a day.
B. cannot still own or have the right to buy, the same or identical property 30 calendar days after the sale.
This part is unclear for me. If I already own the same security in my RRSP, TFSA and unregistered account, do I have to sell all my shares in all 3 accounts to avoid a superficial loss? In other words, if I only sell my unregistered shares, will holding the same security in the registered accounts (shares previously bought outside the 61 day window) cause the loss to be deemed superficial?
Thank you
@Sheep: You can own the same security in another account, just so long as you didn’t purchase any shares of it during the 61-day period. If you did, you will need to sell the number of shares you purchased before the end of the 61-day period (or a partial/full superficial loss may apply).