I’m looking at my portfolio and, like everybody else, I see a lot of red. Tell me what is wrong with the following: If I sell everything where I have a loss and then buy it back immediately I would be in the same position but I would have all those losses which I could apply to future gains for tax purposes over the next many years.
Unfortunately, it doesn’t work that way.
If you sell a stock for a loss and immediately repurchase it, this is called a “superficial loss” and you cannot use it to offset capital gains. The same is true if you sell the stock and an affiliated person – such as your spouse or a company controlled by you or your spouse – repurchases the same stock.
For the capital loss to be allowed by the Canada Revenue Agency, you must wait at least 30 days before repurchasing the security. The restriction also applies to the 30 days before the sale, which means you can’t get around the superficial-loss rule by purchasing additional shares before selling your existing shares at a loss.
Given that stock prices have been exceptionally volatile during the novel coronavirus pandemic, I believe it would be a mistake – unless you really need the cash – to sell your stocks at a loss and wait 30 days before repurchasing them. It’s possible that stocks could fall further in that time, but it’s also possible that share prices could rebound, possibly strongly, if evidence emerges that the coronavirus is peaking or that certain drugs are effective in reversing serious illness in COVID-19 patients.
Imagine how you would feel if you sold a stock for the tax loss, only to watch it climb 30 per cent, 50 per cent or more while you waited to repurchase it. The benefit of the tax loss would be far outweighed by the lost opportunity to share in the stock’s recovery.
There is, however, at least one strategy that investors can use to lock in a tax loss while still participating in a potential market rebound. Although you are not permitted to repurchase an identical security within 30 days, you are allowed to buy a similar stock and still claim the tax loss on the shares you sold. For example, if you sell shares of Bank of Montreal for a capital loss, you could immediately purchase shares of Royal Bank. That way, if bank stocks rebound, you’ll participate in the gain. Another option is to sell a stock for a loss and then purchase an exchange-traded fund that invests in the same sector..
At the end of the 30-day period, you could sell the newly acquired security and repurchase the original stock you sold for a loss. This would allow you to use the capital loss for tax purposes. Remember that capital losses must first be applied against capital gains in the current calendar year. Any capital losses left over can be carried back up to three years or forward indefinitely to offset capital gains in those years.
Do you believe companies will cut their dividends in the current crisis?
Some already have. On Thursday, Ford Motor Co. (F) suspended its dividend to provide “near-term financial flexibility.” Analysts and investors speculate that aerospace company Boeing Co. (BA) and energy giant Exxon Mobil Corp. (XOM) could be next. Given how the pandemic is disrupting virtually every sector of the economy, I expect that we will see plenty of dividend reductions over the next few months.
That said, some dividend-paying sectors are in a better position to ride out the crisis than others. Utilities, power producers, pipelines and telecommunications companies, for example, provide essential services and benefit from contracted or regulated cash flows that insulate them, to an extent, from the economic shocks of the coronavirus.
“Despite their defensive characteristics, the utility, pipeline and telecom sectors have been hit as indiscriminate selling of all stocks grips the market. We believe this is a buying opportunity,” Odlum Brown analyst Cory O’Krainetz said in a note this week.
“It is certainly possible that growth could slow as businesses operate at reduced capacity, but that will likely be temporary and does not diminish the long-term value of the businesses. The businesses are also well capitalized and the names we favour have sustainable dividend payouts.”
Companies that Odlum Brown considers attractive, ranked in descending order of risk, include Enbridge Inc. (ENB), TC Energy Corp. (TRP), Telus Corp. (T), Rogers Communications Inc. (RCI.B), BCE Inc. (BCE), Canadian Utilities Ltd. (CU), Emera Inc. (EMA) and Fortis Inc. (FTS).
E-mail your questions to firstname.lastname@example.org. I’m not able to respond personally to every e-mail but I choose certain questions to answer in my column.