My Portfolio is Down! Are There Any Tax Benefits?

By: Fabio Campanella CPA, CA, CFP, CIM

The S&P/TSX Composite Index, Canada’s benchmark stock index, is currently down to the tune of 30% + from its highs this year. The pain in the stock market is not isolated to Canada, for the most part, every major stock index in the world is down in a similar fashion. The economic impact of COVID-19 has been sudden, and significant for stock investors worldwide suggesting that there is a systematic and profound economic downturn on the horizon.

In times like these investors are looking for anything they can possibly do to roll with the punches.

So, are there any tax-planning opportunities here? The answer is yes but limited.

If you meet most of these criteria, then a strategy called “tax-loss-harvesting” may be an opportunity present right now:

  • You pay tax in a high tax bracket
  • You have a sizable portfolio in a taxable account (i.e. NOT an RRSP/TFSA/RESP etc.)
  • You have taxable capital gains in one of the last three taxation years
  • You anticipate taxable capital gains this year or soon
  • You want to remain in the market to take advantage of the inevitable future bounce-back in stocks

If this sounds like you, then pay attention.

Tax loss harvesting is a tax planning technique whereby an investor will purposely sell investments in a loss position to trigger tax losses. These tax losses can then be carried-back to offset prior year gains or carried-forward to offset future gains. The investor would then re-invest the proceeds of sale into a basket of similar, correlated investments, in order to remain in the market and capture the recovery.

Sounds easy, but it’s not, there are a ton of things that can go wrong.

For example, you can’t sell a stock that is down, the simply re-purchase it right away. In tax-language that’s something called a “superficial loss” and you’ll be disqualified from claiming the loss on your tax return. You also can’t sell an Exchange Traded Fund (ETF) that tracks a specific index (say the Dow Jones Industrial Average - DJIA) and then simply re-purchase another DJIA ETF from a different company, this will land you in the same hot water as the previous strategy.

In addition, how do you know what investment to replace your old portfolio with? If you have a well-diversified basket of large-cap Canadian stocks you can simply sell them off, re-invest in an ETF that tracks the S&P TSX 60 then re-invest in your original portfolio 31 days later (to avoid the superficial loss rules). But what if you’re invested in a basket of stocks with no clearly correlated benchmark index?

As you can see, this is no simple matter. Opportunities do exist in these down times, but I would not recommend a “do-it-yourself” approach here. You’ll need to engage an investment advisor who is well versed in tax, or a tax accountant who is well versed in investments to assist you.

Fabio Campanella CPA, CA, CFP, CIM is a founding partner of Campanella McDonald LLP. He is a tax specialist, an investment advisor, and an estate and life insurance advisor licensed in the Province of Ontario. His practice focuses on building tax-efficient retirement and estate plans for entrepreneurs, retirees, and high-income earning professionals. You can access his website by clicking HERE.

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