News

Time to prune the losers from your portfolio, investment advisers suggest

OTTAWA – With the Toronto stock market down about seven per cent this year and some sectors down even more, chances are you have a loser or two in your portfolio.

Investment advisers say now is the time to consider selling them and taking your losses to offset any gains you might have in other stocks and reduce the taxes you owe.

Portfolio manager Cynthia Caskey at TD Wealth Private Investment Advice says investors may be licking their wounds in many cases after the rough ride for stocks this year.

“This is a way to have a silver lining to offset some taxes,” she said.

Tax-loss selling means crystallizing a loss so that you can offset a capital gain and reduce the amount of tax owing. The loss then can be used against capital gains going back three years or carried forward for future use.

If the investment is only down a little and you think it may come back, Caskey says this probably isn’t the strategy for you. But if your investment has taken a significant hit and is unlikely to bounce back, then selling for tax purposes is something you will want to consider.

The strategy cannot be used for investments held within accounts like RRSPs or TFSAs, which do not face the same taxes as non-registered investments.

To take advantage of a loss, the sale has to settle by the end of the year. That means this year, for Canadian stocks, you will need to sell your shares by Christmas Eve to have it completed by New Year’s Eve. For U.S stocks, the deadline is Dec. 28.

You are also not allowed to repurchase the security you’re selling within 30 days. Otherwise it will be ruled a superficial loss and not permitted under the tax rules.

However, you could look to buy shares in a similar company or an ETF to maintain exposure to the sector if you still believe in your original investment.

For example, if you have an energy stock with a big loss, you could sell it and use the cash to buy an ETF with similar exposure to the price of oil if you think energy prices are going to bounce back.

“It won’t mirror it exactly because it is a different security and has different fundamentals, but at least you’d be able to participate in any sort of movement,” Caskey said.

For foreign stocks, it is important to remember that your loss is calculated in Canadian dollars.

Jamie Golombek, managing director of tax and estate planning at CIBC Wealth Advisory Services, cautioned that even if an investment in a U.S. stock may have fallen, the drop in the loonie will boost your bottom line.

“If you purchased securities in a foreign currency, the gain or loss may be larger or smaller than you anticipated once you take the foreign exchange component into account,” he said.

“The recent decline in the value of the Canadian dollar may increase capital gains or decrease capital losses, or, in some cases, turn what looks like a loss into a gain.”

Caskey said whatever you do, it needs to be done within the context of your portfolio, and that the tax considerations shouldn’t be the only factor in your decision.

Like a garden, she said it is important to recognize where things are working and where they aren’t and make adjustments.

“Sometimes you have to weed your garden. Sometimes things get overgrown and need to be cut back, similarly unexpected combinations that aren’t working so will need to be rearranged,” she said.