In a recent column on tax-loss selling, you wrote: “When you sell a stock for a loss, you must wait at least 30 days before you repurchase it. Otherwise, it will be considered a ‘superficial loss’ and you won’t be able to use it to offset capital gains.” Is that 30 business days or 30 calendar days? And can I avoid the superficial loss rule by buying more of the same stock before selling the loser (instead of after) to maintain my position?
To claim the loss for tax purposes, you must wait until at least 30 calendar days have passed before repurchasing the security. And, no, you can’t get around the rule in the way you suggested. That’s because the restriction on purchasing the same security also applies to the 30 days prior to the sale.
Can I claim losses on a stock that went to zero, even though I didn’t actually sell it because it’s been de-listed?
Yes. According to the Income Tax Act, you may be able to claim a capital loss if one of the following conditions is met:
- The company went bankrupt during the year;
- The company is insolvent and subject to a “winding-up order”;
- The company is insolvent; it no longer carries on business; the fair market value of the shares is nil; and “it is reasonable to expect that the corporation will be dissolved or wound up and will not commence to carry on business.”
According to TaxTips.ca, in such cases, you should submit a signed letter to the Canada Revenue Agency stating that you want Subsection 50(1) of the Income Tax Act to apply to your shares.
Alternatively, contact your broker and ask whether it can help you dispose of your shares. Brokers will often “buy” worthless shares at a price of zero, allowing you to realize the loss for tax purposes and offset your capital gains.
I am a buy-and-hold dividend investor. I use my broker’s dividend reinvestment plan [DRIP] for certain stocks, but because I can only purchase whole shares some idle cash inevitably builds up. Also, some stocks are not eligible for a DRIP. How do you deal with small amounts of cash – say a few hundred dollars here and there – that accumulate in an account? I hate watching my money do nothing.
One solution, which I use myself, is to buy a low-cost index mutual fund that a) has a low initial purchase minimum and b) allows for small continuing contributions. In my case, the initial purchase minimum is $500 and subsequent contributions can be as low as $50. You can then use the mutual fund to soak up small amounts of cash. Check with your financial institution to see what index-fund options are available, and look for a fund with a management-expense ratio (MER) of less than 1 per cent. When small amounts of cash are involved, making regular contributions to a mutual fund is preferable to buying shares of individual stocks because you’ll avoid paying commission costs on every purchase. Yes, you’ll pay the fund’s MER, but when your mutual fund grows to, say, a few thousand dollars in value, you can sell a portion of your units and redeploy the cash into an individual stock to keep your investing costs down. Another option is to park your idle cash in a high interest savings account offered by your broker. These accounts typically trade like mutual funds and are a great way to earn a steady – albeit small – return on your cash.
Can you explain what is meant by “forward” and “trailing” dividend yield? I have looked in a few investment books and I can’t find a written description of either.
The most common way to report a stock’s dividend yield is on a “forward” basis. This method projects total dividend payments over the next 12 months based on the latest dividend, then divides that sum by the current share price. For example, Bank of Montreal’s most recent quarterly dividend – which was declared on Aug. 27 and is payable on Nov. 26 – was for $1.03 a share. Assuming the dividend continues at that rate for four quarters, the total annualized dividend would be $4.12 and BMO’s yield would be about 4.1 per cent ($4.12 divided by BMO’s share price of $100.68). Keep in mind that a company could raise (or lower) its dividend over the next 12 months, so the forward yield won’t necessarily be the same as the actual yield an investor receives. The trailing dividend is the sum of dividends paid over the previous 12 months, divided by the current share price. It’s a backward-looking measure and therefore less useful than the forward yield, in my opinion.
E-mail your questions to jheinzl@globeandmail.com.
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John Heinzl