Tax-Loss Selling with ETFs

[@JustinBenderCPM]

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[@JustinBenderCPM]

*Please Note: As of June 22, 2020, the Vanguard FTSE Canada All Cap Index ETF (VCN) now follows the FTSE Canada All Cap Domestic Index. As this is the same index followed by the Franklin FTSE Canada All Cap Index ETF (FLCD), they are no longer suitable tax-loss selling pairs.

[@angel_bdo]

Amazing video, helped me a lot to understand how things work. Keep it up!

[@franciscaron1137]

Super explanation ! I got to say I just started to watch your videos, reading your blog and website in the last couple days and I've learn so much ! Thank you !

[@JustinBenderCPM]

@Francis Caron - I'm so glad you stumbled across the channel (and the blog!). Thank you so much for taking the time to check it out :)

[@officialLeeKen]

This was simply fantastic, Justin. Thank you.

[@JustinBenderCPM]

@Ken Lee - I'm so glad you liked the video! Thanks for watching :)

[@mikaelhaller9113]

Thanks Justin for the great video and information. Just a quick clarification. If I am considering harvesting tax losses in the future and I regularly add funds to my non-registered account, I would need to make sure to not buy any of the ETF for 30 days before selling it. In other words, if I am considering a tax-loss harvesting sale, hold off on adding any more of that ETF to my portfolio as to not trigger a superficial or partial superficial loss.

[@JustinBenderCPM]

@Mikael Haller - As long as you sell all units in your non-registered account, you don't need to worry that you purchased some of the units within 30 days (you only need to worry about units of the same ETF that you purchased in your RRSP, TFSA, etc. and still hold at the end of the 30-day period).

[@mikaelhaller9113]

@@JustinBenderCPM Thank you for the reply. Just a quick follow up. If my spouse and I were to set up a margin account and hold a Canadian ETF with the idea of harvesting a capital loss during a downturn in the market, should we hold the same ETF? In other words, would it make sense to both hold VCN with the idea of selling it and purchasing XIC later? I worry that if we use different ETFs in our margin account and then sell, we might buy the identical property my mistake and trigger a superficial loss. By holding the same ETF, at least, it would reduce some of the work trying to figure out proper ETF pairings. Is this thinking correct?

[@JustinBenderCPM]

@@mikaelhaller9113 - That should be okay from a tax-loss harvesting perspective. However, if they are joint accounts (i.e. Mikael/spouse + spouse/Mikael), this could cause your ACB tracking to be much more complicated (as it would need to be calculated across both joint accounts).

[@mikaelhaller9113]

@@JustinBenderCPM Thank you for the quick reply. They are not joint accounts for the reason you mention above.

[@matiasiozzia9547]

Solid, Solid and Solid video. Thanks again!

[@martymendes1]

Hi, I just revisited this excellent video. I'd be so grateful if you could answer this for me: 1. I sold all my shares of HXDM in my Taxable Account to harvest the loss. Now I realize I made a small purchase of HXDM in my daughter's Informal Trust Account within the 60 day window. Do I now need to sell the equivalent of that small purchase in the Informal Trust to avoid a superficial loss? If I don't, is the entire loss in jeopardy or just that small portion? 2. I had / have some of the same etfs (HXDM, HXS) in both my Taxable Account and my daughter's Informal Trust Account. When calculating the ACB for those securities, do I calculate it separately by account or together across the two accounts? So confused! Thanks so much for all your help. I really appreciate it.

[@BiesTV]

Regarding identical securities for ETFs of ETFs: say, you sell VEQT at a loss and buy XEQT. I assume these would be considered similar but not identical properties, right? The allocation in the underlying ETFs is different and the underlying ETFs do not track the same indices.

[@JustinBenderCPM]

@Sébastien Desforges - Although I've read from others online that they think an ETF pair like VEQT and XEQT would be considered identical property by CRA, I completely disagree. As you mentioned, their underlying ETFs follow none of the same indexes, their fees are different, their allocation to Canadian vs. foreign equities is different, etc. In my personal opinion, CRA wouldn't have a leg to stand on if they went after an investor that used XEQT and VEQT for tax-loss selling purposes.

[@BiesTV]

@@JustinBenderCPM Okay, thanks a lot Justin! Very much appreciated.

[@Steven-wq8tx]

Nice insights! Had no idea capital losses were tax deductible. Also had no idea what ACBs were, I’m a fairly new investor with a lot of contribution room in my TFSA and RRSPs so I won’t have to worry about this stuff for a decade but it’s still useful knowledge!

[@JustinBenderCPM]

@Steven - Capital losses are generally not tax-deductible against income (except in very limited cases), but they can be used to offset realized capital gains :)

[@yinyanz]

Hey Justin - perfect timing for this video and great material. I have my TFSA and RRSP where I like it to be, an am exploring the concepts of Non-registered accounts. I am wondering if you have any excel template of sort that you recommend to keep track of your loss and gain in your non-registered account. Again great video - looking forward to this mini-series.

[@JustinBenderCPM]

@yinyanz - thanks! If you're digging this topic, also check out my buddy Dan Bortolotti's recent blog post on superficial losses: canadiancouchpotato.com/2020/10/22/how-to-avoid-superficial-losses/ I love the adjustedcostbase.ca for tracking your ACB and calculating your capital gains/losses in a non-registered account. You can also export the data to excel.

[@nicoh9100]

Hello Justin, thanks for the informative video. I'd like to ask about your point on 11:17. If I were to implement the tax-loss strategy detailed in this video (ETF pairs), do you simply mean cancelling the DRIP that is already in place on my margin account, prior to selling an ETF that tracks one index and buying another ETF that tracks a similar index? Or should the DRIP have never been implemented on the particular account in which I will be conducting the tax-loss strategy described above?

[@JustinBenderCPM]

@Nico H - You wouldn't want a DRIP running on the security you're selling at a loss in the taxable account (as it may cause more units to be purchased after your sale). If this does occur though, you can just sell those new units within 30 days. You also want to ensure you do not have a DRIP running on the same security that you're selling in the taxable account and that you also hold in other accounts (like your spouse's accounts, your RRSPs, TFSAs, etc.).

[@nicoh9100]

@@JustinBenderCPM Thanks for the info! Appreciate it.

[@fede198888]

Hello Justin. Thank you for this very informative video. May I ask you a question? I have been purchasing regurerly VCN since 1.5 years. Now I would love to realize the capital losses. Last batch bought: one week ago. Shall I wait 3 more weeks (+ 2 days) to sell all my shares and buy XIC? Thank you and please continue uploading videos!

[@ImranKhan-iz8gi]

Thank you very much for such an awesome explanation.

[@JustinBenderCPM]

@Imran Khan - It was my pleasure - thanks for checking out the video :)

[@harpreetsandhu8253]

Hi Thanks for the info.. If I sell XIT and then buy some of its holding as individual stocks, will it be considered superficial loss?

[@LauzonAl]

great vid!

[@QualitativeInvestor]

Thanks Justin, as usual great video. Couple questions.... 1. You didn't mention at the beginning 1:00 of your video RESP as Register account, why? 2. How efficiently to use carry in order to offset future capital gain? Sell in gain, pay tax (minus carry tax loss) then purchase/spent on non taxable/capital stuff? Because repurchase ETF with that money, does not make sense. 3. Is there any limit how much tax loss I can care?

[@JustinBenderCPM]

@Dmitry D - Thanks for watching. I've included my responses to your questions below (with the exception of #2, which requires more clarity): 1. Mostly to save time. Tax-loss selling also does not apply to RESPs, RDSPs, RRIFs, LIRAs, LRSPs, LIFs, LRIFs (and any other registered plans) 2. Not sure what you mean by this question - would you please clarify? 3. There is no limit to the amount of capital loss you can realize.

[@QualitativeInvestor]

​@@JustinBenderCPM How efficiently to use this Offset taxable capital gains? Basically this tax-loss selling strategy is for short term investment less that 3 years , correct? Otherwise I don't see any other reason to do it.

[@JustinBenderCPM]

@Dmitry D - No, tax-loss selling can have benefits for decades - it would depend how long you can defer the gains for. You may also be able to defer gains into retirement, where you may be taxed at a lower rate (which could further amplify the overall benefits of the strategy). If you can offset capital gains that you've realized, you will pay less in taxes now. This will allow you to keep more money in your portfolio to compound over time (if you would have needed to withdraw from it to pay your tax bill), or it could allow you to save an additional amount in your portfolio (as it wouldn't be required for the additional capital gains tax bill). I also mention many other benefits of the strategy in the video.

[@QualitativeInvestor]

@@JustinBenderCPM Sorry, I missed the word "indefinitely" on 2:20. What did you mean on 2:20 "losses can be carry back for up to 3 years"? Can you please give us example.

[@JustinBenderCPM]

​@@QualitativeInvestor - Say you realized $30,000 of capital losses in 2020 (and didn't realize any capital gains that year). Further assume you realized $30,000 of capital gains in 2017 (3 years before 2020). If you were a top rate Ontario taxpayer in 2017, you would have paid an additional $8,030 of taxes that year ($30,000 capital gain x 50% capital gain inclusion rate x 53.53% top Ontario tax rate = $8,030). If you submitted a T1A form to CRA to carry back your 2020 capital loss of $30,000 to 2017, the CRA would write you a check for $8,030 (which you could reinvest back into your portfolio).

[@FIREWeGo]

Wonderful explanation. Thank you very much!

[@JustinBenderCPM]

@F.I.R.E We Go! - You're very welcome - thanks so much for watching! :)

[@antoinelamoureux-auclair904]

Hi Justin! Thanks for the great video. Would similar all-in-one ETF from Vanguard and iShares be considered the same? For example VEQT and XEQT?

[@JustinBenderCPM]

@Antoine Lamoureux-Auclair - In my opinion (which CRA may disagree with), VEQT and XEQT are not identical ETF pairs (so you could use them for tax-loss selling purposes). Their underlying ETFs do not follow the same indexes in the same weightings.

[@neodenjin]

Thanks for the video Justin. At 15:20 you mention that many ETFs distribute capital gains at year end. Are you referring to the Reinvested Capital Gains distribution? I noticed that for 2019, a lot of ETFs actually didn't have a reinvested Cap gains distribution. Could this be the ETFs becoming more tax efficient and easier to manage? Do you expect that this is something that we will see going forward? Also, how hard does the CRA chase after superficial losses? Doing an analysis of both you and your spouses duplicate stock/ETF purchases across multiple brokers, accounts, funds seems like a nightmare. Have you actually known someone that was hit with a superficial loss?

[@JustinBenderCPM]

@Sahill Mohan - Generally, the capital gains distributions are reinvested by the ETF provider (but they don't necessary need to be). Looking at one year of capital gains distributions doesn't tell us much about future tax years. Even in 2019, the BMO Discount Bond Index ETF (ZDB) distributed a surprise capital gains hit to taxable investors of $0.17 per unit. I haven't known the CRA to chase down many superficial loss villians, but I don't think I would test them ;) As you mentioned, keeping track of this stuff is a nightmare. Our team had a blast tax-loss selling during the recent pandemic. We had to review the transactions in all our client's accounts, their corporate accounts, their trust accounts, their spouse's accounts and their RESPs. And if we had purchased shares of VCN (or some other target ETF) in their spouse's TFSA within the 61-day period (which we often had), we were required to sell the shares we purchased in the spouse's TFSA before the end of the 61-day period.

[@orimotoizumi]

Your example uses $100,000 as a dollar amount for selling, then purchasing the paired ETF. Is there a point where the lot becomes too large to make this non-feasible? For example, trying to off load and immediately buy double that amount...is it possible the orders won't process?

[@JustinBenderCPM]

@SakuraPop - If you're trading broad-market ETFs, there shouldn't be any issues with liquidity (even for larger amounts) - but make sure you use limit orders. However, you may need to adjust your limit order if the price changes while your trade is being filled.

[@huiwangca]

Great explanation!

[@JustinBenderCPM]

@Wang Hui - Thanks! :)

[@leocleoc]

Justin, I know in the past you paired VXC with XAW as suitable tax loss selling pairs. Are they still suitable? TIA ... keep up the great work

[@JustinBenderCPM]

@Leo C. - VXC and XAW are even better tax-loss selling pairs than before! VXC recently reduced its fees and started holding VIU (instead of U.S.-based international equity ETFs), so it now has comparable tax-efficiency to XAW (i.e. less withholding tax drag than its earlier structure).

[@BrunoAlves-uy3sl]

@Justin & Shannon Bender, is it worth executive tax-loss selling when you are in the accumulation phase and don't plan to sell your positions in the near future?

[@JustinBenderCPM]

@Bruno Alves - For sure! There are a number of reasons: 1. You'll likely need to rebalance your portfolio, triggering capital gains in the process. 2. Many ETFs will distribute capital gains at year-end (which are usually reinvested back into the fund), so your losses can offset the taxes on these surprise distributions. 3. Cheaper or more tax-efficient securities may be released, which could be more suitable for your portfolio (but switching to the new security could generate capital gains in the process, unless you have losses to offset them with).

[@BrunoAlves-uy3sl]

@@JustinBenderCPM Many thanks, Justin. Your video is so applicable now in this market down turn.

[@kunalgupta5996]

$Twitter Inc can i sell individual stocks at a loss and then buy back an etf that hold them? Can I sell my tech stocks for a loss and then by qqq and claim the loss? Or is that considered a wash sale?

[@JustinBenderCPM]

@Kunal Gupta - You can sell individual stocks at a loss and immediately purchase an ETF that holds that particular stock (it's not considered a superficial loss).

[@cccpsra]

Couldn't recognize you without your sub-zero costume :D. I am eyeing 10% returns and followed PWL's advice to have ITOT, iefa, XIC, iemg inside my RRSP. What are your thoughts about so called actively managed ETF like ARKK?

[@JustinBenderCPM]

Ayon De - Haha - although I am the recorded voice of Sub-Zero Returns, I'm not the one behind the mask ;) 10% might be a bit too high of an expectation (we're currently forecasting around 5-6% equity returns going forward): kzbin.info/www/bejne/eIm4lpSdnsSKipo I don't advocate any actively managed ETFs, including ARKK. There will always be a handful of ETFs that outperform a passive investment strategy - you just won't be able to predict them in advance (unfortunately, you can't eat ARKK's past returns).

[@standard_error]

Is it possible to harvest capital losses when the average purchase price of an ETF is higher than the current price? For example, suppose I buy 100 units of a 20$ ETF, and then a year later I buy another 100 units of the same ETF at 40$. The average purchase price is now 30$. Suppose now the price of the ETF falls to 35$. Would selling at 35$ trigger a capital gain since my average purchase price was 30$? Or, alternatively, am I allowed to specifically pick the last 100 units and sell only those for a capital loss of 5$ per unit?

[@JustinBenderCPM]

@Nicolas van Hell - In your example, selling at $35 would still trigger a $5 capital gain per share (at least in Canada). As you mentioned, Canadians need to use the average cost of the security for tax purposes (we can't pick which lot to sell).

[@standard_error]

@@JustinBenderCPM Thanks!

[@allentripathi3504]

Sir, Is wash-sale rule same as Superficial loss rule? or are there any difference between them?

[@JustinBenderCPM]

@Allen Tripathi - "Wash-sale rule" and "superficial loss rule" are typically used interchangeably (but the term "superficial loss" is used more often in Canada)

[@allentripathi3504]

@@JustinBenderCPM Thanks a lot!

[@dilon3]

Thank you so much

[@JustinBenderCPM]

@dilon3 - Thank YOU for watching! :)

[@jean-claudebertrand7125]

Is selling XIC and then buying VCN in a non-registered account enable a tax-loss harvesting or considered by CRA a superficial loss?

[@JustinBenderCPM]

@Jean-Claude Bertrand - as XIC follows the S&P/TSX Capped Composite Index, while VCN follows the FTSE Canada All Cap Index, they would generally not be considered identical property, based on CRA's interpretation bulletin (so this would avoid the superficial loss rules).

[@dylanennema]

hey justin, could i sell soxx and then buy smh? would that work?

[@JustinBenderCPM]

@Dylan Ennema - Selling SOXX at a loss and purchasing SMH shouldn't be considered a superficial loss, as they track different indexes (although I'm not certain about the tracking error between the two). Tax-loss selling works best when using broad-market equity or bond ETFs that track slightly different indexes.