In our last ETF Lab we looked at the unprecedented opportunity within fixed income to employ a tax loss harvesting strategy. This week we turn our focus to several opportunities on the equity side to help your clients harvest tax savings.

Refresher on tax loss harvesting

Tax loss harvesting is a method in which an investor realizes losses by selling securities that currently have a fair market value that is lower than its cost base. This strategy applies only to non-registered accounts.

If you’re planning on selling an investment at a loss to offset it against capital gains, for this year or any of the last three years, you must do it before year-end. You will typically need two business days for the transaction to settle, so be sure to trade your ETFs/mutual funds/stocks by December 28, 2022.

Don’t forget about superficial loss rules

When an investment is sold at a loss, and an identical investment is purchased either 30 days before or after the loss was realized, Canadian tax laws will deny the loss.

To avoid the superficial loss rules investors can add a similar but not identical investment in their portfolio. For example, an ETF typically can be purchased with the same exposure as another ETF provided it tracks a different index.

An illustrative example of tax loss selling:

Significant losses in some equity markets potentially provides investors an excellent tax loss selling opportunity. As one example, see the potential tax savings on rotating out of ZEA – (BMO MSCI EAFE Index ETF) into QDX – (Mackenzie International Equity Index ETF).

Please note this is for demonstration purposes only. Actual tax savings will depend on the individual. Please consult a tax expert. This demonstration is only relevant to securities/funds held in non-registered accounts that have lost value. Source: Bloomberg; price return as of October 31, 2022

Value of employing a tax loss harvesting strategy in 2022

• Using ETFs, advisors can maintain the current asset allocation of the portfolio, while providing clients tax alpha.
• Tax loss selling gives advisors more portfolio management options moving forward:
  • When rebalancing, tax loss selling can help offset other capital gains generated in the portfolio.
  • With capital losses that can be carried forward, advisors can potentially trade out of legacy ETFs that may be more expensive into a potentially more cost-effective ETF.
  • Advisors can use this as an opportunity to reorient their equity portfolio.

2022 tax loss harvesting opportunities (equity):

Below is a small selection of individual stocks that are down significantly YTD. To offset realized capital gains investors can sell out of stocks, which are trading at a lower price than their adjusted cost base, and rotate into a single, diversified broad market index ETF. Investors can then re-enter some or all these positions after 30 days or remain invested in the ETF.

Individual Canadian equities:

Individual US equities:

Broad market index ETFs can be effective instruments in a tax loss selling strategy, as they can help investors stay invested and help crystallize losses. As we showed last week, investors can potentially rotate from one index ETF to another, provided these ETFs track different indices.

Broad market Canadian equity index ETFs:

Large cap US equity index ETFs:

International (EAFE) equity index ETFs:

Global dividends ETFs:

For a full list of potential tax loss selling opportunities and/or to find out more about any of the ETFs listed above please contact your Mackenzie sales coverage.