Unfortunately, not every investment idea this year has worked out for investors exactly as planned. But thanks to the Canada Revenue Agency tax rules, investors have the opportunity to make a gift out of the odd lump of coal.
Tax loss selling involves selling an equity position that is down in order to capture the loss for tax purposes. Once a capital loss is triggered, you can use that loss to offset capital gains and reduce your tax bill. Losses must first be applied against capital gains in the current year; any remaining losses can be carried back up to three years and carried forward indefinitely. Given trade settlement times, the tax-loss selling deadline is Dec. 23, 2011.
One of the drawbacks with tax loss selling is that investors must wait at least 30 calendar days before the same stock can be bought back or CRA will deny the loss. If the stock is still liked, maybe because the shares are now attractively valued or because price momentum has turned positive, below are a couple of ideas to consider.
There are three basic tax-loss selling strategies for equities:
1. Sell the stock and move to cash, effectively locking in the loss.
2. Sell the stock and replace it with another stock or highly correlated ETF in the same sector to maintain industry exposure. An example would be selling Sun Life Financial, with a YTD return at the time of writing of -36 per cent, and purchasing Royal Bank, an equity that has a high correlation to Sun Life.
3. Sell the stock, temporarily replace it with a highly correlated ETF then repurchase the stock. The ETF can be used as a temporary proxy to maintain exposure until the original stock can be repurchased a minimum of 30 days later.
Given the S&P/TSX Composite has declined more than 10 per cent YTD, there are no shortage of candidates eligible for this strategy. Call your financial advisor or tax specialist for more details.
Shea Sanche is a certified financial advisor with Raymond James Ltd. in Penticton. You can contact him at firstname.lastname@example.org. This article is a general source of information and should not be considered investment advice. The views are those of the author and not necessarily those of Raymond James Ltd., a member of CIPF.