Clients who have made juicy profits in some areas of the stock market in the past year may be able to benefit from a tax strategy of harvesting losses on losing investments to offset their taxable capital gains and maintain similar exposure through ETFs.
Daniel Straus, head of ETF research and strategy with National Bank Financial Inc. in Toronto, has come up with a list of stocks from the S&P/TSX composite index that have each dropped by more than 10% so far this year, in a recent ETF strategy note. Along with each stock, he has suggested a corresponding ETF that could be purchased to provide exposure to the same industry sector.
For example, Barrick Gold Corp. has fallen by 17% for the year to date as of Nov. 16. Straus suggests iShares S&P/TSX Global Gold Index ETF, sponsored by BlackRock Asset Management Canada Inc. of Toronto, could provide comparable exposure.
Straus’ note highlights companies with a minimum 2% weighting inside a corresponding ETF and a 45% correlation. With the Barrick example, the stock has a 12% weighting in the corresponding ETF and an 84% correlation.
If a stock is sold to capture a loss, investors must wait 30 days after the sale before buying the stock back to preserve the tax loss in accordance with Canada Revenue Agency rules, Straus explains. In case of short-term turnaround in the stock being sold, clients may want to remain exposed to the corresponding industry sector after selling the losing stock. During those 30 days, investors may buy other securities, such as individual stocks or an ETF, to help provide similar exposure.
“The ETF will give a sector-specific return in place of the stock,” Straus writes in his note. “When appropriate, investors can cycle back into the underlying equity.”
A client who is applying realized losses against capital gains is able to carry the losses back three years. Alternatively, losses may be carried forward indefinitely and applied against future gains.
Other examples Straus provided include Precision Drilling Corp., which has fallen by 53% this year and corresponds with BMO Junior Gas Index ETF, sponsored by BMO Asset Management Inc. of Toronto. He also mentions Cenovus Energy Inc., down by 37%, and the corresponding BMO Equal Weight Oil & Gas Index ETF, as well as Eldorado Gold Corp. and BMO Equal Weight Global Gold Index ETF.
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