As the year-end approaches, many investors with taxable accounts may be seeking to dispose of securities that have lost money. The strategy of tax-loss selling allows the investor to claim a capital loss, which offsets capital gains for the current year. Any unused net capital losses can then be applied against taxable capital gains in any of the three preceding years, or carried forward indefinitely to future years. To realize capital gains and losses in 2018, trades must be executed by Thursday, December 27 to ensure settlement by Monday, December 31, the last business day of 2018.
Canada Revenue Agency (CRA)’s clearly defined superficial loss rules state that an investor cannot purchase the same security 30 days before or after a disposition and continue to own that security beyond this period. This rule also applies to the investor’s spouse or common-law partner, and any corporation, partnership or trust they control.
Exchange-traded funds (ETFs) can provide investors an opportunity to maintain a sector allocation while harvesting tax-losses on disposed securities with negative returns. As markets have sold off in the latter half of 2018, there may be opportunities to redeploy the proceeds at a discount.
For example, an investor holding preferred shares may have experienced a substantial loss through 2018.1 Depending on the size of the position, selling these preferred shares could create a capital loss that can be used to offset current, previous or future capital gains within CRA limits.
Reinvesting the proceeds of the sale into a preferred share ETF would provide the same investor with a more diversified exposure to preferred shares while avoiding the superficial loss rules.
For more examples of how specific ETFs might replace individual securities sold for tax-loss purposes, advisors can contact their Invesco Sales representative.
For more information on year-end tax strategies, read Invesco’s Tax & Estate team’s Year-end tax tips for 2018.