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The PWL Tax Loss Selling Report

October 3, 2014 - 2 comments

It’s finally here! While many Canadians were gearing up for the much anticipated iPhone 6 launch, I was patiently awaiting an upcoming portfolio management software release: the PWL Tax Loss Selling Report.

PWL advisors can now generate a report that shows all non-registered client accounts that have unrealized capital losses. Any capital losses realized must first be used to offset capital gains realized in the current tax year; they can then be carried back up to three years (or carried forward indefinitely). This allows investors in relatively high marginal tax brackets to defer taxes and possibly realize them at a more advantageous time.

The report was inspired by Larry Swedroe’s tax loss selling rule of thumb. His rule states that an investor should consider realizing a loss if it is at least $5,000 and at least 5% of the book value.

For example, suppose Other Barry purchased the DFA Canadian Vector Equity Fund Class F (DFA600) for $70,730. On September 30, 2014, the fund had dropped in value to $65,342.53 (resulting in an unrealized capital loss of $5,387.47).  This loss represents a 7.62% drop in the book value ($5,387.47 ÷ $70,730 = 7.62%). In this case, both of Swedroe’s tax loss selling thresholds have been met. The generated report will now include Mr. Barry’s holding as a potential tax loss selling candidate.   

Know when to fold ‘em

The decision about whether to realize a capital loss depends on the investor’s particular tax situation (my colleague, Dan Bortolotti, wrote about this topic in a recent blog). Once the decision has been made to realize the loss, a replacement security must be chosen (in order to maintain similar market exposure). I would encourage advisors and DIY investors to have a tax loss selling plan in place prior to implementing their portfolios.

I’ve included the tax loss selling pairs below that we use with our PWL clients, as well as the monthly tracking errors of the underlying indices. As discussed in our white paper, Tax Loss Selling, tracking error is the standard deviation of the differences in the monthly returns of the underlying indices. A low value indicates that the indexes have tracked each other closely in the past.

Suppose the advisor decides to realize the loss for Mr.Barry. He would place a trade to switch all units of the DFA Canadian Vector Equity Fund Class F (DFA600) to the DFA Canadian Core Equity Fund Class F (DFA256). The trade would settle on October 1 (trade date + 1 business days) and would need to be held for at least 30 days before it was switched back to the original holding (in order to avoid being deemed as a superficial loss). In this example, the replacement fund would need to be held by the investor from October 2 to October 31 (30 days). If the advisor switched back to the original fund on October 31, it would settle on November 3 (trade date + 1 business days), avoiding the superficial loss rules. ***Note:  Most ETFs and stocks settle on T+3***

By: Justin Bender with 2 comments.
  28/08/2017 11:04:33 AM
Justin Bender
@Cristian: The one example I could think of where realizing gains ahead of time to use up capital losses could make sense is if you were concerned that the government may increase the capital gains inclusion rate above 50% (so your old capital losses wouldn’t offset as many gains as before). Other than that, I would argue that it makes more sense to carry them forward to use as you rebalance your portfolio (i.e. when you sell equities to buy bonds, you’ll likely realize gains).

However, if you’re adding enough to your portfolio each year where it is unlikely that you will ever need to sell equities at some point to buy bonds (i.e. you have enough new cash to simply top up your fixed income allocation when it becomes underweight), it may make sense to trigger some gains to offset the losses (in case the government does change the capital gains inclusion rate at some point).
  27/08/2017 10:11:36 AM
Hi Justin,
I found on the following:

"It may be better for tax purposes to offset your capital losses with capital gains instead of carrying them forward, if possible!"

What is your take on that? Do you advise your clients to do it?

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