The 2024 Canadian Guide to Tax Loss Selling

Dear investor,

Today’s edition of the Canadian Dividend Investing newsletter is going to focus on tax loss selling season, an often-misunderstood strategy taken on by investors to minimize their tax bills.

We’ll take a closer look at the strategy, some ways investors implement it, and a couple ways I use other investors’ tax loss selling to my advantage.

Let’s take a closer look.

First up: what’s tax loss selling?

The concept is ridiculously simple. Tax loss selling is when you sell your losers by the end of the year so you can claim the capital loss on your taxes. 

Ideally, you’d claim these losses against gains, using the two to even out the gains and losses. The end result is you don’t owe any additional taxes.

There are specific rules in place to ensure investors don’t just sell a stock, get their tax credit, and immediately buy the name back again. The big rule is you must wait 30 days before buying the same investment back (if you’re taking the tax credit.)

So, for example, today is December 15th. If you sold something for a tax loss on December 16th, you’d have to wait until January 15th to buy back in.

Some investors try to get around this rule by buying a virtually identical investment. For example, if you own a S&P 500 ETF, you could sell it, collect the tax loss credit, and then immediately buy one of the many other S&P 500 ETFs out there to replace it. This is called a “superficial loss” and the CRA is very aware of this trick. So I wouldn’t try it.

We’ll also note that tax loss selling is just a thing in your taxable account. Your RRSP is tax deferred and your TFSA is entirely tax free, so there’s no fancy tax loss selling moves to be made in those accounts.

Also, you can’t just sell a stock before the end of the year to get the tax credit. The trade must settle in the applicable calendar year. So for Canadian investors, you’ll need to sell by December 30th. This used to be December 29th, but the two day settlement period for trades was reduced to one day earlier this year.

Many investors sell far earlier than the end of December, giving themselves a chance to buy back in during early January. The thought process in selling early is most investors sell between Christmas and New Year’s, which is when prices will be the worst. A little planning can both get a better price on the sell part and get a little cheaper price on the buy back in part. Or so the logic goes.

How to identify tax loss selling stocks

This section is deceptively simple.

The easy way to identify tax loss stock candidates is to look at your portfolio, see what’s down, and hit the ol’ sell button.

Easy, peasy.

But I prefer a different method. First, I take a look at all the transactions I’ve made during the year.

I rarely sell, so these are mostly buys. But, inevitably, there will be 1-2 sells in there.

Take a look at what your account history looks like. Your assets are likely up this year, and chances are you may have taken some profits at some point. If that’s the case, then it’s time to take a look at potentially selling a dud that has been stinking up your portfolio.

With five minutes of research you can see whether it’s advantageous to take a tax loss this year. If there are no gains, then perhaps you should be waiting until next year.

Some people, when faced with this situation, will sell a long-term winner to offset a loser, thereby freeing up cash while having no taxes owing. I’m not a fan of this strategy, since it often results in a nice company being sold for all the wrong reasons.

In short, you want to take advantage of tax loss selling season to potentially lower your taxes, but don’t let the tail wag the dog here.

How I play tax loss selling season

Your author prefers to look at tax loss season a little differently. Instead of selling at this time of year, I’m much more interested in buying.

As a reminder, my investment philosophy is relatively simple. I’m looking for:

• Boring companies which generate loads of free cash flow

• Which pay sustainable (ideally increasing) dividends

• That are trading at a reasonable valuation

• With an ideal holding period of forever

If tax loss selling season takes a stock that checks off my boxes and makes it cheaper, then I should be excited about it.

This is the same reason why I’m not punting anything at this time of year. I sell a stock for very specific reasons. I’m not selling because I want to minimize taxes, especially if it’s a company I still believe in. I don’t want to make decisions simply because of taxes.

Some tax loss selling ideas

What I’m mostly looking to do is identify dividend paying stocks that have had a somewhat lackluster 2024.

Here are 10 I came up with after about five minutes of thought:

• BCE (TSX:BCE)

• Telus (TSX:T)

• Rogers Communications (TSX:RCI.B)

• Mondelez (NASDAQ:MDLZ)

• Pepsico (NYSE:PEP)

• Canadian Apartment REIT (TSX:CAR.un)

• Goeasy (TSX:GSY)

• Stella Jones (TSX:SJ)

• Brookfield Renewable Partners (TSX:BEP)(TSX:BEP.un)

• Algonquin Power & Utilities (TSX:AQN)

The more interesting part is how to identify companies that are likely to be beaten down for tax loss selling. What we’re looking for is:

• Companies with poor 2-3 year performance

  • Many investors are patient enough to hold for one year of underperformance, but not 2-3 years

• Companies with a poor outlook

  • Telecom is a great example here, many investors think Canada’s telecoms are cooked

• Companies with temporary, fixable problems

  • Investors overvalue the short-term and underestimate what can happen in the long-term. Use this to your advantage

These are the types of stocks that are most likely to be hurt during tax loss selling season.

Can you swap similar companies and get the tax credit?

One situation where it might be interesting to try and grab a tax credit is when you’re able to cycle out of an investment into something similar enough. This should generate comparable returns while staying on the good side of the superficial loss rule.

As we’ve established, selling a S&P 500 ETF for another S&P 500 ETF is no bueno. The government will make you pay those taxes back.

But other similar situations are allowed, that’ll get you most of the benefit. For instance, if you’re a long-suffering BCE shareholder and you get rid of your shares in exchange for Telus, that’s perfectly okay. It’s easy to say that you prefer Telus for X, Y, or Z reason. And once telecom recovers in Canada, it’s likely that both Telus and BCE will perform comparatively well.

It’s a simple way to get your tax loss while not giving up exposure to a sector you might be bullish on long-term.

But, at the same time, this is hardly a risk free exercise. Exchanging one stock for a similar one might work out about the same, but it also might not. Perhaps BCE outperforms Telus going forward. You would’ve been better off to do nothing.

I don’t want to go super deep into this, since I’m hardly a tax expert. Talk to your accountant before doing any of this stuff.

The bottom line

I know of at least one investor (who I like and respect) that does pretty much all his buying during tax loss season. He’s probably engrossed in annual reports at this very moment.

I completely understand his thought process, and I agree that generally tax loss selling season is a fertile hunting ground. I’d never limit my buying to just the latter part of December, but I agree it’s a nice time to look.

Personally, I think many investors overemphasize tax loss selling season. Your default reaction should be to do nothing. Only after careful analysis should you act. Make sure something makes sense for your portfolio before doing it, rather than punting some loser strictly for the tax savings.

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