Tax-Loss Selling

Tax-loss selling is a year-end tax planning technique, whereby securities with unrealized losses are disposed of, to offset capital gains realized during the year. The result is a reduced taxable balance. However, before disposing of any investments for the purposes of tax-loss selling, you should consider the associated costs with the disposition, whether the investment still has strong fundamentals, and whether it aligns with your overall investment strategy.

To take advantage of this tax-loss strategy for 2019, transactions must be initiated by December 27, 2019 for Canadian and U.S. securities, in order to settle before year-end. Similarly, transactions of Canadian and U.S. option contracts have a one-day period, meaning that these transactions must be initiated by December 30, 2019.

Superficial Losses

It is important to understand the rules surrounding superficial losses, as this type of tax loss may prevent you from claiming capital losses. Superficial losses are triggered when you, or a related party (i.e. your spouse), dispose of and then acquire identical property either 30 days before or after the disposition date. This means that if you sell and repurchase your asset at a loss within a 30-day time frame, that loss will be disallowed until the ultimate date of disposition. To avoid triggering a superficial loss, we recommend you check your holdings across all of your accounts to ensure that an identical investment has not been made either 30 days before or after the disposition date. At the end of the 30-day period, you will be eligible to acquire identical property without triggering tax consequences in the form of a superficial loss.

Carrying Forward and Carrying Back of Capital Losses

Capital losses can be carried back up to three years (to offset capital gains realized in 2016, 2017 and/or 2018) or carried forward indefinitely, to offset future capital gains. If you intend to take advantage of this rule, there are a few items to keep in mind. Before carrying a capital loss balance to another year, it must first be used to offset all capital gains from the current year. Once the capital gains of the current year have been fully offset, the remaining balance can be either carried back to be used immediately or carried forward to be used in the future. When carrying back capital losses to be used against a previous year’s capital gains, it will reduce your taxable income for the previous year, and may result in a refund of previously paid taxes. However, your net income for that year, which is used to calculate certain credits and benefits, such as Old Age Security, will not change.

Sector and Company Analysis for Tax-Loss Selling

Although we have seen strong performances by both the TSX and S&P-500 indexes (with an average increase of 15% in 2019), there are a number of sectors that have underperformed this benchmark.

The weakening of the cannabis industry has translated into declines in the TSX healthcare sector. Cannabis companies have faced several barriers on the path to profitability, which include limited visibility of the regulatory framework, global legalization, black market conversions and pricing.

The energy sector is also continuing to struggle as oil prices decline; this appears to be caused by greater efficiency in U.S. production, a low expectation on future global consumption, and transportation inefficiencies between Western Canada to Texas for refining. While this sector fell by 20% in 2018, and 10% in 2017, the majority of oil and gas stocks have fallen significantly over the third quarter which closed at a 52-week low.

Some investors may also have losses ranging from 15% to 30% in the preferred shares sector. This significant drop was due to the unexpected drop of the 5-year bond rates from a year ago. Individual positions can be easily replaced within the preferred shares universe, as the drop was wide spread amongst all preferred issuers and ETFs.

Investments that no longer meet your objectives should be sold, regardless of whether or not the capital losses are beneficial in the near future since capital losses can be carried over indefinitely. It would be wise to assess your portfolio with your advisor regarding what actions can be taken before year-end.