More than half the stocks in the S&P/TSX Composite index have negative price returns this year, according to analysis from National Bank of Canada Financial Markets, with 62 of those names falling by more than 10% as of Nov. 17.
This dismal performance creates a ripe opportunity for tax-loss harvesting, wrote Daniel Straus, Tiffany Zhang and Linda Ma of NBCFM in an ETF strategy note released this week.
As of Nov. 17, four of the 10 sectors within the S&P/TSX Composite — materials, communications services, utilities and real estate — have posted negative returns for the year to date.
On the fixed-income side, long bonds have also declined significantly.
Tax-loss harvesting involves selling a security with a capital loss in order to offset realized capital gains, which reduces a client’s tax liability. The strategy has no effect in tax-sheltered accounts such as RRSPs and TFSAs, but can work in non-registered accounts. Capital losses can be applied in the current year, carried back three years or carried forward indefinitely.
The strategy is common, but there are several caveats.
Clients who tax-loss sell may be tempted to repurchase the same securities at a later date. To avoid running afoul of the superficial loss rules in the Income Tax Act, clients must wait at least 30 days after the sale to repurchase the security. The same goes for anyone considered an “affiliated person” to the client, such as a spouse or common-law partner.
Clients would also violate the superficial loss rules if they bought the same securities during the period beginning 30 calendar days before the sale.
The definition of the “same securities” — known officially as “identical property” — is broader than one might expect. The Canada Revenue Agency considers different series of the same mutual fund to be identical property. ETFs that track the same index (e.g., the S&P/TSX Composite), even if they are manufactured by different financial institutions, are also considered identical property.
To help investors avoid running afoul of the identical property rule, Straus, Zhang and Ma developed a list of 62 ETFs that clients can buy to maintain approximate exposure to the 62 stocks that have fallen by more than 10% for the year to Nov. 17.
These pairs include:
- TELUS International CDA Inc. (-64% as of Nov. 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 to tax-loss sell Canadian-listed stocks is Wednesday, Dec. 27. Trades executed on Dec. 28 and 29 will settle on Jan. 2 and 3, 2024, respectively — making them ineligible for tax-loss harvesting in 2023.