Sign up for the new Globe Advisor weekly newsletter for professional financial advisors on our newsletter sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know.
Stocks and funds have taken a beating this year amid volatile markets, raising questions as to whether investors should take the opportunity to do some tax-loss selling now.
Although tax-loss harvesting in Canada is usually done at year-end within a non-registered account to offset investment gains, financial experts suggest that investors might consider selling losers before then.
“If you believe that it’s time to sell a position because you’ve lost faith in it, or don’t think that it is going to recover anytime soon, that becomes the right decision,” says Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth in Toronto.
The investment decision should be primary, he adds.
“If you get mutual fund distributions in the form of capital gains, you may be able to shelter some of that tax by using some losses on that too,” Mr. Golombek says.
The problem with doing early tax-loss harvesting is that investors may not know what their taxable capital gains this year will be, he adds. Capital losses must offset gains in the current year and then can be applied against gains from the prior three years.
If investors don’t have capital gains this year or from the past three years if they didn’t sell securities perhaps because markets were rising, “then you really haven’t accomplished anything,” he says. Unlimited losses, however, can be carried forward to offset future gains.
When investing in foreign securities, investors also need to be mindful of using the exchange rate at the time they were purchased and sold to calculate any gains or losses, he says. Otherwise, “what might look like a loss could actually turn out to be a gain.”
No matter when tax-loss selling occurs, investors, as well as their spouses or partners, cannot buy back the same security for 30 days or that triggers the superficial-loss rule, he warns. The Canada Revenue Agency will deny that loss, and it will be added to the cost base of that investment.
Although one strategy is to take a loss and then invest in a similar but not identical security within 30 days to take advantage of a potential rebound, investors need to be careful, he adds.
For example, if an investor sells an investment fund that tracks an index, such as the S&P 500, at a loss, and invests in another fund tracking the same index but sold by a different provider, that too is deemed a superficial loss, he says.
How to use the strategy to offset gains elsewhere
Michael Zagari, associate portfolio manager with Mandeville Private Client Inc. in Montreal, says that, generally, it’s better to leave tax-loss selling to year-end, but it’s a case-by-case decision for his clients.
When taking the losses around December, investors can potentially take advantage of the so-called January effect when markets often rally at the start of the new year, he says.
This year, the only tax-loss selling that he has done so far was for a pharmaceutical industry consultant in her 50s. She sold her cottage in June for a capital gain of about $140,000, and half of that gain is taxable because it’s her second property.
It was an opportunity for her to cash in at a top price in the cottage market and have an offset for those gains, Mr. Zagari says.
As $70,000 would be taxable at her top marginal tax rate of 53 per cent, he sold enough stocks in her cash account to generate the $140,000 in losses to nullify the investment gains from the cottage sale.
His client sold shares of Amazon.com Inc. AMZN-Q, Walt Disney Co. DIS-N, Meta Platforms Inc. META-Q, and Uber Technologies Inc. UBER-N to get the required loss. Because the market kept declining over the 30 subsequent days – when the superficial-loss rule applies – the client was actually able to buy back the same shares at lower prices just after this period, he adds.
With some of her cash, she also added smaller-cap technology stocks, including Affirm Holdings Inc. AFRM-Q, Lightspeed Commerce Inc. LSPD-T, and Roblox Corp. RBLX-N, because they were trading at steep discounts, he says.
“She is not touching this money for 10 years” and part of the strategy is to gain exposure to the metaverse with a couple of the names, he adds. “The strategy is aligned with her risk tolerance.”
Getting the best price for the stock
Benjamin Gallander, co-founder and president of Contra the Heard investment letter, is a fan of early-year, tax-loss selling – typically around May – because markets can get weaker in the summer.
“Waiting until the end of the year doesn’t make a lot of sense” when a lot of people are selling and creating a lot of supply in the stock, Mr. Gallander says. “That depresses the price of the stock, which means that you ultimately get less money for it.”
By selling in May, “I can often get a better price before a summer market slowdown that often occurs,” says the contrarian value investor. “I can also buy back [the stock] during the summer if I want to.”
He didn’t sell stocks this May though.
“A lot of my stocks have certainly come off their highs, but they are still gainers,” he says. “I have one that I am looking to possibly sell, but I want to get a certain price for it.”
The goal is to keep the most after-tax dollars in your pocket by using tax losses efficiently, he says.
“We often think that being successful is all about the winners, but how the losers are played is also key.”
When he sells a stock, he may just crystallize the loss to offset capital gains and buy it back sometime after 30 days if he still likes the company.
“Most stocks, especially at this time of year and in this market climate, are not going to jump a lot in value,” he says.
“The ones that are more likely to jump in value are the ones that have come down the most, such as the technology stocks. I am not predicting that they will, but they were so overvalued.”
But he usually waits to do his bargain-hunting for equities at year-end when most people are doing tax-loss selling and driving prices of certain stocks lower.
“There are guys like me on the other side of the trade who have higher returns because of that,” Mr. Gallander says.
For more from Globe Advisor, visit our homepage.