Tax-Loss Selling Strategies

Well, we all know what's certain in life-- death, and taxes. And so we're going to help you a little bit, hopefully, today, talking about the tax side of things. We've all had that sinking feeling when we check our portfolio holdings and see we've taken a hit on a stock or two or three. There is, suppose, a silver lining. That is, at least the tax rules allow us to use those losses to offset other capital gains we might have. Joining us to explain the rule, how to use it, make the best of a bad situation, Scott Booth. He joins us from TD Wealth, where he's an analyst with North American equities. How are you? Very good. Thanks. Yourself? I'm OK. I was looking at your list of some of the losers out there. And unfortunately, I know some of these names a little too intimately right now. But we're talking right now about tax loss selling. And why are we talking about this now? Well, I mean, it comes to the end of the year and everybody starts thinking about it now. You've got to get those trades by, in Canada's case, December 23, in the States, December 27. And that's if you want to have losses that are recognized in 2016. Right. So you have to crystallize the loss this year in order to use it. Let's just back up a little bit before we hit the dates. And just, what is the rule? How does it work? Well, essentially, if you've got gains in your portfolio, you're going to pay taxes on them when you realize those. In non-registered accounts. In non-registered accounts. That's right. So not in your TFSA or your RSP, etc. Or your RIF. Or anything like that. Exactly. But if you want to minimize those taxes that you're paying on the gains that you've made, you can tax law sell and realize some losses and use those to offset and reduce your tax bill. And how long-- I know you've said. If you have any gains in this year or for the last three years, you can use those losses against them? That's exactly-- you can go back three years. And then you can use them this year and you can also carry them forward indefinitely. So I mean, if you've got stuff that's down and, whether you want to hold it or sell it, you can realize a loss on it and use that going forward. And you said, in terms of realizing the loss, this comes down to just selling the stock and selling it in time by the end of the year. So give me the dates again, because I don't want... because they're important. I know people will sometimes call in a panic. It's like, oh, I want to get them on December 29. It's like, no. Too late. It's too late. So what are the dates? So in Canada, it is December 23. If you're US stocks, there's a little different settlement process there, so it's December 27 if you want to get-- but I mean, you're better probably better served in looking after these things now. If you're making it part of a broader portfolio review or rebalancing, you can decide where you want to take some gains, because certainly there's a lot of stocks that have done well this year. And then as part of that tax management process, taking some losses, whether you want to reallocate or just part ways for a short time with a certain security. There's lots of opportunities to do that. You bring up a really good point. Because this isn't just about a tax management. This is about portfolio management and tax management at the same time. So my question to you is, I've got some stocks. They haven't done so well. How do I decide that I do want to sell them? Or how do I decide I'm going to hang on to them and keep on going? Sure. Well, you certainly don't want tax to be the primary motivator for those decisions. But if you've bought something and the investment thesis hasn't played out, the reasons why you own it come into question, these are certainly good cues that it may be time to find a different solution. And certainly those are probably candidates that go with the top of the list for things to sell. Obviously, looking at your portfolio or your statement and seeing the ones that have big red numbers beside them or negative signs, that's a good place to start. But really, I mean, I think, like I said, you don't have to part ways permanently with things. There is a 30 days window after which, if you decide you want to sell something and then repurchase it more than 30 days later, you will get credit for that loss. Right. But you have to wait 30 days. Absolutely. And on either side of that. So you can't purchase 30 days before you sell or 30 days after. You bought it. OK, that's important. And this is the superficial loss rule. Exactly. If you don't want the CRA to come back to you and say that it is a superficial loss-- Did all that for nothing then. Let me ask you about-- I saw a note here. You said something about ETFs. There's something interesting about some ETFs around superficial tax losses. Sure. Well, if you're swapping between two ETFs and they track the same index-- So it's one company's ETF versus another, but they're both, let's say, gold ETFs. Exactly. And if they track specifically the same underlying index, then you can run afoul of the CRA-- So even though technically it's a different security, it's the same vague-- Same exposure, let's call it. The CRA will say-- No thanks. Interesting. I did not know that. That's really interesting. You have a list attached to the report that you put out. I said unfortunately I was a little too familiar with some of the names. And again, I'm not picking on anybody here. These are just some of the names-- Valeant is one of the stocks. I think it's down year to date 79%. Cameco, down about 37%. Linamar, I know, was on the list, down about 28%. I think we can bring them up here. You've got a long, long list here. And it's funny, because for lot of these-- there's the look right now. A lot of these, the investment thesis has changed for many of these. It has indeed, yes. And there's a lot of oil and gas companies on here, too. Probably more so before, but we're still seeing some now right now in terms of what's going on. Do you think-- are there any buying opportunities that can happen at the end of the year, because of all this tax loss selling? I think there certainly are. I mean, it seems like people do leave it to the last minute. And like I said, don't do that. Go get your ducks in a row now. But maybe you can look at other people and take advantage of them during-- And then when someone else is motivated to sell things in mid-December, maybe there are some buying opportunities there. One of the areas that I cover pretty closely is the preferred share market. And it seems like there's a perennial weakness in the second week of December kind of thing. And in my view, that's probably a much better time to be a buyer than a seller. Interesting insight, Scott. Thanks so much. Great. Thanks for having me. Scott Booth. He's an analyst with North-- excuse me-- analyst of North American equities with the portfolio advice and investment research group at TD Wealth.