In Episode 2, Justin gets into the weeds of tax-loss selling with ETFs. You’ll learn the core rules to follow, common pitfalls to avoid, and the best “portfolio-tested” ETFs for implementing this tax-efficient strategy. Back by popular demand, the show also features another ETF Kombat, this time with VCN and XIC facing-off in an epic battle you can’t miss. And if you don’t have time to listen to the entire episode, skip ahead to the TLDL (too long, didn’t listen) segment, where the entire episode will be summarized in under five minutes.
- Introduction to tax-loss selling [0:00:47.2]
- Why it’s sometimes okay to “sell low” [0:02:38.2]
- Understanding CRA’s superficial loss rules [0:03:36.2]
- Which ETFs are classified as “identical property”, according to CRA? [0:05:47.2]
- Should you worry about the future performance of your replacement ETF? [0:07:30.2]
- Why you need to coordinate tax-loss selling with your spouse [0:09:18.2]
- Why DRIPs can be an investor’s worst nightmare when tax-loss selling [0:11:00.2]
- How diversifying your portfolio managers can “di-worsify” your tax-loss selling strategy [0:11:51.2]
- Should you look for tax-loss selling opportunities year-round, or just in December? [0:12:58.2]
- How big of a loss do you need before selling your ETF? Larry Swedroe’s $5,000 and 5% rule [0:14:03.2]
- Justin Bender’s $10,000 and 10% adjusted rule [0:16:17.2]
- Should you bank losses, even if you have no gains to offset? [0:18:19.2]
- Justwealth’s tax-loss selling strategy, featuring James Gauthier, Chief Investment Officer [0:20:24.2]
- PWL Toronto’s tax-loss selling strategy, featuring Shannon Bender, Portfolio Manager [0:23:09.2]
- ETF Kombat: VCN vs. XIC [0:26:44.2]
- Introducing PWL Toronto’s tax-loss selling ETF pairs: [0:31:33.2]
- Global equity (ex Canada): XAW/VXC [0:32:38.2]
- Canadian equity: VCN/FLCD, XIC/FLCD, ZCN/FLCD [0:35:11.2]
- U.S. equity: XUU/VUN [0:40:21.2]
- International equity: XEF/ZEA [0:41:50.2]
- Emerging markets equity: XEC/ZEM [0:43:58.2]
- Improving your international and emerging markets equity tax-loss selling ETF pairs [0:45:35.2]
- Are asset allocation ETFs ideal for tax-loss selling? [0:49:42.2]
- TLDL (Too Long, Didn’t Listen): A quick summary of the main topics [0:52:40.2]
Blog posts/resources discussed in this episode:
- Part 1: Introducing Tax-Loss Selling
- Part 2: When Should You Sell Your Losers?
- Part 3: Two Takes on Tax-loss Selling: Justwealth vs. PWL
- Part 4: Which ETF Pairs Should I Use When Tax-loss Selling?
- PWL Tax-Loss Selling white paper (updated December 2019)
- As Easy as ACB – Understanding and tracking your adjusted cost base with ETFs
- Combining International and Emerging Markets Equity ETFs
Justin, what are your thoughts on IEFA/IEMG DRIPs in a RRSP? Do these purchases trigger superficial losses when tax-loss selling XEF/XEC in a taxable account? Similarly, would a DRIP on ITOT in a RRSP potentially trigger a superficial loss when tax-loss selling XUU?
Is tax-loss selling on bond ETFs ever something you seek out i.e. ZDB? If so, is a ZAG DRIP in a RRSP a potential superficial loss issue?
Is the lesson here that if you are interested in engaging in this pursuit – tax-loss selling – do not use DRIPs in any of your accounts (TFSA, RRSP etc.)?
@Alon – Although I can’t speak for CRA, I do not feel IEFA/XEF, IEMG/XEC, or ITOT/XUU are identical properties for superficial loss purposes (as an investor would not be indifferent to holding one security over the other). They transact in different currencies, have different product fees, and different tax implications across various account types. However, I generally recommend cancelling all DRIPs in all account types if an investor is considering implementing a tax-loss selling strategy:
https://canadianportfoliomanagerblog.com/part-i-introducing-tax-loss-selling/
Although tax loss selling opportunities on bond ETFs do not arise as often, when they do, I tend to sell ZDB and immediately purchase ZAG (or XBB or VAB). Again, I do not any of these securities to be identical properties (CRA could always contest this stance though … not that they would necessarily win). After 30 days have passed, I switch back to ZDB.
I would like to clarify if it is possible to tax loss harvest in a certain scenario.
I plan on committing soon on a very complicated 1 ETF portfolio of either XEQT or VEQT.
Let’s look the example below:
2020-01-01 : 50 000 $ buy (50 shares of 1000$)
2021-01-01 : 50 000 $ buy (40 shares of 1250$ because the stock was up since last year)
My portfolio is now 112 500 $ (90 x 1250$).
2021-06-01 : market down 10%, so my portfolio is now 101 250 $.
Am I right if I believe tax loss harvesting would not be possible because my ACB is 90 x 1125$ = 100 000$. Actually, I wouldn’t even be considered to have had a capital loss as my portfolio is actually 101 250$.
It seems to me that, in the long run, having only a one ETF portfolio diminishes the “chances” to have tax loss harvesting opportunities. Would you consider that as a little sacrifice for the sake of simplicity?
Thanks and keep up your amazing work. Really appreciate your podcast and blog!
Hey Justin, thanks for all the work you do for this community. Greatly appreciated.
My question:
Since I follow your model portfolios across all account types (RRSP, TFSA, Taxable) and as mentioned above you cannot continue to make contributions to TFSA/RRSP without incurring a superficial loss within the 60 day window on a given ETF, is there a strategy where you can continue to make your regular contributions and still perform a tax loss harvest in the taxable account?
Would you just end up selling the same ETF across all three accounts?
I don’t see suspending your regular TFSA/RRSP ( I do mine bi-weekly) as you miss out on 2 months of dollar cost averaging.
Thanks for your input.
Kosta.
@Kosta: As an example, if you sell XUU in your taxable account to realize the loss and immediately purchase VUN with the proceeds, this would not be a superficial loss (as long as you don’t add to your existing holdings of XUU in your RRSP and TFSA during the 61-day period).
If you want to top-up U.S. equities with your new contributions, you could just buy VUN in your RRSP and TFSA account during the 61-day period.
Ahh I see and then you flip back the newly purchased VUN over the 61 days back to XUU after the time period is over bringing your registered accounts back in line with the original ETFs.
Makes sense.
@Kosta: You could switch VUN back to XUU, but I’d probably just leave the holdings as is (to reduce your bid-ask spread cost).
Another great podcast Justin. You’ve come out swinging with two very relevant episodes.
Question – you give XIC a triumphant victory over VCN, but you’re model ETF portfolios recommend VCN. I understand there isn’t a substantial difference between the two but enough that one is better than the other. Will you change your recommendation?
Also glad you’re keeping BMO in the conversation, it’s a relatable Canadian company in the space so convincing others of low-cost index ETFs might be easier with that brand and your information is arming me to do so. Thanks!
@Ryan Myricks: Thanks for the feedback :)
In client (and personal) accounts, I already use VCN, XIC and ZCN (and consider them to be fairly identical). However, I think Vanguard can slightly improve on VCN by gradually switching its benchmark to the FTSE Canada All Cap Domestic Index. I would prefer for this podcast/blog to encourage Vanguard to make the change on their own (rather than swapping VCN for XIC in my model ETF portfolios and possibly causing investors to make an unnecessary change to their holdings.
Thank you for this great podcast.
I have a question that wouldn’t the capital gain resulting from the repurchase of the “same” ETF at a lower price (and if it goes back up to the original value) offset the capital loss harvested from the tax-loss selling?
@Rex: You’re very welcome!
You are correct – as the replacement ETF recovers over time, it will eventually have an unrealized gain which is equivalent to the loss realized on your original ETF. The main benefit is the tax deferral (you do not need to sell the replacement ETF right away, so it can continue to compound over time). You may even have the opportunity to realize the gain when you’re in a lower tax bracket (such as in retirement).
Got it. Thank you. Look forward to the next episode.
Not sure whether I missed this but, if.i hold the same ETF in an RRSP and a taxable account, is it still considered a superficial loss when the security is sold in the taxable account and continues to be held in the RRSP? Note, the RRSP has DRIP set up but not the taxable account.
Excellent podcast.
@Mike: If you’re just holding the same ETF in an RRSP, and you haven’t purchased any additional shares during the 61-day period, you’ll avoid a full or partial superficial loss. However, if there is a DRIP set-up on the same ETF in an RRSP, this could cause a partial superficial loss if new shares are purchased during the 61-day period (I discuss a similar scenario in the podcast at the 11-minute mark).
Thanks for listening! :)
Thanks Justin for putting together this great podcast! And just in the nick of time with Dan’s hiatus – I was worried I’d have nothing to listen to :).
This topic was very useful: while I previously understood the basics of tax-loss-selling, I was nervous I’d mess it up somehow, so this gives me a lot more confidence and knowledge to do it properly.
And bonus points for all the great sound-bytes in the first episode – I wonder if this is the first appearance of Tobias Funke in a financial podcast?
@Graeme: I’m glad you liked it! (and extra points to you for noticing the obscure Arrested Development sound bite ;)
Can I just get a link to the MP3? Will this be uploaded to your youtube channel?
@sahill: Here’s the YouTube channel – https://www.youtube.com/watch?v=letEjokniac
I just asked our marketing department about the MP3 files – they said they use WAV files, as they’re higher quality (so please check out the YouTube link instead).
For Canadian equity, is there any reason to use FLCD instead of using VCN for either of XIC/ZCN, or would it essentially be the same?
@DN: I go through the reasoning in the podcast (I will also be releasing blogs/white papers shortly, in case you’d rather read the articles).
Would the CRA consider ZDM and ZEA to be identical? ZDM is the hedged version of ZEA, so I would expect they are not identical. I have reached out to others with this question, but no one has been able to provide a rock solid answer. It usually when something like ” Yeah it should not be identical, but you just never know when it comes to the CRA.”. And the CRA did not respond at all when I asked them!
What do you think?
@D. Munday: I think that ZDM is an entirely different security than ZEA. An investor would not be indifferent between holding one or the other, so they are therefore different.
Although CRA could potentially argue that they are identical securities, they would lose credibility in the process.