As of November 17, four of the 10 sectors in the S&P/TSX Composite – materials, communications services, utilities and real estate – posted negative returns year to date.
On the bond side, long bonds have also declined significantly.
Tax loss harvesting involves selling a security with a capital loss to offset realized capital gains, which reduces a client’s tax liability. The strategy has no impact on tax-advantaged accounts such as RRSPs and TFSAs, but may work on non-registered accounts. Capital losses can be recognized in the current year, carried back three years, or carried forward indefinitely.
The strategy is common, but there are some limitations.
Customers who make loss-making sales may be tempted to repurchase the same securities at a later date. To avoid violating the Income Tax Law’s perfunctory loss rules, customers must wait at least 30 days after selling to repurchase the security. The same applies to all people who are considered “close people” of the client, for example the spouse or life partner.
Customers would also violate the superficial loss rules if they purchased the same securities in the period beginning 30 calendar days before the sale.
The definition of “like securities” – officially known as “identical property” – is broader than one would expect. The Canada Revenue Agency considers different series of the same mutual fund to be identical property. ETFs that track the same index (such as the S&P/TSX Composite) are also considered identical ownership, even if they are produced by different financial institutions.
To help investors avoid violating the ownership rule, Straus, Zhang and Ma developed a list of 62 ETFs that clients can purchase to maintain approximate exposure to the 62 stocks in the year ending November 17th have fallen by more than 10%.
These pairs include:
- TELUS International CDA Inc. (-64% as of November 17) and the Fidelity Canadian Value Index ETF
- NorthWest Healthcare Properties (-54%) and the BMO Equal Weight REITs Index ETF
- Aritzia Inc. (-49%) and the NBI Canadian Family Business ETF
- First Quantum Minerals Ltd. (-46%) and the Horizons Copper Producers Index ETF
- Innergex Renewable Energy Inc. (-40%) and the Dynamic Active Energy Evolution ETF
- Northland Power Inc. (-39%) and the iShares Global Clean Energy Index ETF
The last day for tax-loss sales of Canadian-listed stocks is Wednesday, December 27th. Trades executed on December 28th and 29th will settle on January 2nd and 3rd, 2024 respectively – so they will not be affected by tax loss recovery in 2023.
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