With the Canadian market performing so poorly this year there may be on opportunity for advisors to take advantage of a little used strategy
An opportunity that doesn’t usually present itself for advisors should be available this year.
“With the Canadian stock market down more than 7% this year, it is likely that taxable investors who implemented the majority of their portfolio during the 2015 calendar year will have some tax loss selling opportunities available,” said Justin Bender, an advisor at PWL Capital in Toronto.
“As many Canadians tend to hold their Canadian equities in their taxable accounts, there could be more tax loss selling than usual in 2015, as they have been one of the worst performing asset classes year-to-date.”
The deadline in order for trades in order for losses to be available for 2015, is Dec 24th for Canadian listed securities and Dec 28 for U.S.-listed securities.
ETF investors might benefit more from this strategy.
“For passive ETF investors in relatively high tax brackets, it should certainly be discussed with their tax advisor (as the tax benefits can outweigh the implementation costs),” said Bender. “For individual stock pickers or active mutual fund investors, there is more uncertainty as to whether the benefits will outweigh the costs. For example, if a stock or mutual fund is sold and replaced with another security for 30 days (in order to avoid the superficial loss rules), the replacement security’s performance may lag behind the original security by such a degree as to offset any tax advantage of the strategy.”
When an ETF is sold at a loss, it should generally be replaced with a similar but not identical security, in order to avoid the superficial loss rules and maintain your market exposure.
“Luckily, there are many ETFs from Vanguard Canada, BlackRock Canada, and BMO that can give investors similar market exposure,” said Bender. “This reduces the likelihood that the replacement ETF will underperform the original ETF during the 30 day holding period. At the end of the 30 day holding period, the investor may even choose to keep the replacement ETF and not switch back to the original ETF in order to avoid additional bid-ask spreads and commissions (if they are indifferent between holding either security).”
“With the Canadian stock market down more than 7% this year, it is likely that taxable investors who implemented the majority of their portfolio during the 2015 calendar year will have some tax loss selling opportunities available,” said Justin Bender, an advisor at PWL Capital in Toronto.
“As many Canadians tend to hold their Canadian equities in their taxable accounts, there could be more tax loss selling than usual in 2015, as they have been one of the worst performing asset classes year-to-date.”
The deadline in order for trades in order for losses to be available for 2015, is Dec 24th for Canadian listed securities and Dec 28 for U.S.-listed securities.
ETF investors might benefit more from this strategy.
“For passive ETF investors in relatively high tax brackets, it should certainly be discussed with their tax advisor (as the tax benefits can outweigh the implementation costs),” said Bender. “For individual stock pickers or active mutual fund investors, there is more uncertainty as to whether the benefits will outweigh the costs. For example, if a stock or mutual fund is sold and replaced with another security for 30 days (in order to avoid the superficial loss rules), the replacement security’s performance may lag behind the original security by such a degree as to offset any tax advantage of the strategy.”
When an ETF is sold at a loss, it should generally be replaced with a similar but not identical security, in order to avoid the superficial loss rules and maintain your market exposure.
“Luckily, there are many ETFs from Vanguard Canada, BlackRock Canada, and BMO that can give investors similar market exposure,” said Bender. “This reduces the likelihood that the replacement ETF will underperform the original ETF during the 30 day holding period. At the end of the 30 day holding period, the investor may even choose to keep the replacement ETF and not switch back to the original ETF in order to avoid additional bid-ask spreads and commissions (if they are indifferent between holding either security).”
