Canadian investors are increasing their exposure to exchange-traded funds (ETFs). These funds can help unlock many compelling investment opportunities and can also be used to reach a variety of other financial goals. In this article, we’ll explore the use of ETFs intax-loss harvesting –also referred to astax loss selling.
Investors can use tax-loss harvesting by selling non-registered investments for a value below their original cost. The idea is to crystallize capital losses to offset any capital gains realized in that tax year. It’s also possible to carry capital losses back into the previous three tax years and/or carry them forward indefinitely.
Meanwhile, investors can purchase similar assets to the ones just sold. This makes it possible to remain in the market and maintain a well-balanced portfolio. However, keep in mind the “superficial loss” rule. This rule states that if investors buy back the same security within 30 days of the sale, they cannot claim the tax benefit from the capital loss.
Using ETFs in a tax-loss strategy
At first glance, the superficial loss rule appears to limit the options available to investors. However, there is a way to buy back into the same asset class or sector using ETFs.
For example, let’s say you sell shares of a Canadian bank at a loss. Two weeks later, you see indicators that the Canadian banking industry may be poised to regain some ground. Of course, you cannot repurchase shares of the same bank within 30 days without invalidating your capital loss. But youcanbuy a Canadian bank stock ETF instead. The ETF is considered “materially different” from your original position, so it does not trigger the superficial loss rule. It’s a convenient, low-cost and transparent way to gain exposure to a given asset class or sector after selling a security at a loss.
Of course, this solution will not provide the exact exposure of your original position, but it does enable you to participate in the potential rebound of stocks in the Canadian banking sector. And single stocks can have high correlations to sectors in many cases. This is especially true in banking.
A tax loss may provide the opportunity to make a portfolio adjustment
The security sold can be effectively replaced with an ETF that can help meet specific investment goals, such as market exposure, portfolio diversification or volatility management.
You can still apply this strategy when the assets sold at a loss are shares or units of another ETF (or mutual fund).
Reinvesting in a different ETF can be a way of upgrading or repositioning that investment. However, if you sell shares of an ETF and buy back into another ETF that tracks the same index within 30 days, you may likely trigger the superficial loss rule.
Consult with a tax specialist
Before planning or enacting a tax-loss strategy.
Closely watch end-of-year deadlines
For completing a tax-loss sale. To apply the loss to the current tax year, you must ensure that the transaction settles by December 31. Remember, settlement dates are typically two business days after a sale is initiated.
Additional resources
Ask your qualified tax advisor to assist you in making informed investment decisions and understanding the impact of tax on your ETFs. To learn more about ETF investing visit ourETF Learning Centre.
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Disclosure
Last reviewed: January 1, 2023
RBC iShares ETFs are comprised of RBC ETFs managed by RBC Global Asset Management Inc. and iShares ETFs managed by BlackRock Asset Management Canada Limited. Commissions, trailing commissions, management fees and expenses all may be associated with investing in exchange-traded funds (ETFs). Please read the relevant prospectus before investing. ETFs are not guaranteed, their values change frequently and past performance may not be repeated. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional.
The information contained in this article does not constitute an offer or solicitation to buy or sell any investment fund, security or other product, service or information to any resident of the U.S. or the U.K. or to anyone in any jurisdiction in which an offer or solicitation is not authorized or cannot legally be made or to any person to whom it is unlawful to make an offer or solicitation. The information is not intended to provide specific financial, investment, tax, legal or accounting advice for you, and should not be relied upon in that regard. You should not act or rely on the information without seeking the advice of a professional.
The information and opinions herein are provided for informational purposes only and should not be relied upon as the basis for your investment decisions.
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