Strong markets mean there are fewer tax-loss candidates this year, but almost 20 Canadian stocks have declined by at least 10 per cent.peterschreiber.media/iStockPhoto / Getty Images
‘Tis the season for tax-loss harvesting and hunting for bargains among this year’s beaten-up stocks.
Investors have until Dec. 30 to sell securities to book losses against capital gains in their taxable accounts. Under a new rule that came into effect earlier this year, the settlement period for trades is only one day instead of two.
Investors also need to be mindful of the Canada Revenue Agency’s (CRA) superficial loss rule that prohibits repurchasing a security, such as a stock or fund, within 30 days following a tax-loss sale.
This rule, which applies to affiliated people such as a spouse, also precludes buying the same security 30 days before the sale. That effectively becomes a 61-day period of not owning the stock or fund. If this occurs, the CRA will deny the loss and the purchase is added to the adjusted cost base of the repurchased investment.
However, investors can still buy non-identical securities, such as a different stock or exchange-traded fund (ETF), in the same industry sector during that period.
Daniel Straus, managing director of ETFs and financial products research at National Bank of Canada Financial Markets in Toronto, says buying an ETF that holds a stock sold for tax-loss purposes reduces fear of missing out on a bounce-back in the next 30 days.
“That’s the whole purpose of suggesting this trade,” says Mr. Straus, who recently released a report on tax-loss strategies using Canadian-listed ETFs.
There are fewer tax-loss candidates this year given that the S&P/TSX Composite Index has gained around 21 per cent, but he says about 20 stocks were off by at least 10 per cent as of Nov. 8.
The report notes that BCE Inc. BCE-T and Rogers Communications Inc. RCI-B-T are down sharply, but investors could get similar exposure through Global X Equal Weight Canadian Telecommunications Index ETF RING-T. (BCE’s weighting in the ETF is 31 per cent and Rogers’s is 33.6 per cent.)
In the information technology sector, Open Text Corp. OTEX-T and Lightspeed Commerce Inc. LSPD-T have each seen double-digit declines this year. The companies have a 6.2-per-cent and 1.8-per cent-weighting, respectively, in iShares S&P/TSX Capped Information Technology Index ETF XIT-T.
And in the utilities sector, holders of Algonquin Power & Utilities Corp. AQN-T and Northland Power Inc. NPI-T could realize tax losses on those names and invest in BMO Equal Weight Utilities Index ETF ZUT-T, in which they have a 6.4-per-cent and a 6.5-per-cent weighting, respectively.
Typically, one notices “performance-chasing in the ETF market,” Mr. Straus says, “but at this time of year, you see inflows into ETFs that have done poorly.”
After 30 days, there are some outflows from those ETFs, but they’re not as high as the inflows, he says. “When people do the tax-loss trades, they land on an ETF and can find that they’re happy with it.”
Investors who sell an ETF for a tax loss and buy another one in the same sector need to make sure these funds don’t track the same index, he warns. The CRA will not recognize it as a sale even if the ETF has another name and is sold by a different provider.
David MacNicol, president and portfolio manager with Toronto-based MacNicol & Associates Asset Management Inc., is also seeing fewer tax-loss opportunities in the U.S., where the S&P 500 index has gained around 25 per cent so far this year.
For clients owning money-losing securities, “we’ll look at the charts to see whether we should be selling now or wait toward the end of the year,” because they might still rebound, he says. “Then, we will sell but have less of a loss.”
A tax-loss candidate is iShares MSCI Mexico ETF EWW-A, he says. Mexico has been a target of U.S. president-elect Donald Trump’s threats about increased tariffs and anti-immigration measures, while its currency has also come under pressure.
Mr. MacNicol’s firm is making a shopping list of stocks that could benefit from a so-called “Santa Claus rally,” or a rally leading up to Mr. Trump’s inauguration on Jan. 20, 2025.
Hard-hit U.S.-listed retail names such as Lululemon Athletica Inc. Lulu-Q, Walgreens Boots Alliance Inc. WBA-Q, Dollar General Corp. DG-N, Dollar Tree Inc. DLTR-Q and Nike Inc. NKE-N will get a look for potential buys, he says.
With Mr. Trump promising tax cuts to individuals and businesses, Mr. MacNicol says, “Americans are going to feel a lot richer next year, and could start buying.”
Nike’s stock has been in a free-fall but a new management team wants to return to its roots by focusing on innovations in its footwear lineup, he says.
Among Canadian-listed stocks, he’s eyeing Algonquin Power & Utilities, a renewable energy power business with most of its assets in the U.S. “The strength of the U.S. dollar, relative to the Canadian dollar, has hurt them,” he says.
Rogers and Toronto-Dominion Bank TD-T are two other names that could fare better in a potential Santa Claus rally, he adds. “There is so much bad news that has been baked into TD that I don’t think it can get any worse.”
Other tax-loss rules to keep in mind
Investors with realized capital gains can trigger a loss to offset current-year profits first, then carry them back three years, says Vanessa Sarveswaran, a vice-president for tax, retirement and estate planning at CI Global Asset Management in Montreal.
“You should carry back your 2024 loss to 2021 before that year becomes out of reach as capital losses can only be carried back for three years,” she says. “Of course, losses can be carried forward indefinitely.”
If investors sell a stock for a tax loss, they need to make sure it’s not in the red owing to a corporate action – such as a spinoff or a large special distribution – as opposed to a true market decline, Mr. Straus says. “That’s something we have caught in the past.”
Some investors will also need to deal with recent changes to the capital-gains inclusion rate. As of June 25, the proportion of a capital gain that’s taxable increased to 66.67 per cent from 50 per cent for individuals on realized annual gains exceeding $250,000.
While the measure has yet to pass into law, Ms. Sarveswaran says her firm is acting as if it will.