Weekend Reading – Taxable investing and superficial loss rule edition

Weekend Reading – Taxable investing and superficial loss rule edition

Hey Everyone…

Welcome to my latest Weekend Reading edition – this one about taxable investing and the superficial loss rule.

You’ll also find some of my favourite recent finds from the personal finance and investing blogosphere here too!

Here are some of my recent updates on the site:

This was my latest monthly dividend income update. It’s great to see our hourly wage increasing steadily (month after month) from a few key investing accounts.

Thank goodness I took ahold of my financial journey years ago. Here is why I really think you should become a DIY investor!

Have a great weekend and thanks for your readership!

via GIPHY

Weekend Reading

Nice update here by Dale Roberts with his Canadian Wide Moat Portfolio.

I’ve long since built my own Canadian dividend ETF per se, and happen to own every stock in his Wide Moat list below:

  • Banks = Royal Bank (RY), TD Bank (TD), Scotiabank (BNS).
  • Telcos = Bell (BCE), Telus (T).
  • Pipelines = Enbridge (ENB), TC Energy (TRP).

Combined, I DRIP multiple shares of each of these stocks every quarter.

You can read how I unbundled ETF XIU to create my own Canadian dividend income stream here.

As part of this unbundling, I also happen to own a few other Canadian moaty stocks in my opinion in bunches: Canadian National Railway (CNR) and Waste Connections (WCN) in particular. While the dividend yields of these stocks are low, dividend yield isn’t everything – long-term growth is important too.

Matt Poyner knows a think or two about dividend investing. He carries the torch when it comes to Beating the TSX (BTSX) Strategy.

Matt looked at dividend investing as a way to combat any rising rates.

From Matt:

“The bottom line is that, based on the evidence, long haul dividend investors need not be concerned with interest rates. A dividend-based investment strategy, especially one that focuses on both yield and growth has outperformed the benchmark index in both rising and falling interest rate environments.”

Food for thought….

Jeff Immelt, the former CEO of General Electric, on decision making:

“1,000 books get written about leadership and change and all that stuff. Knowing what to do isn’t that hard, knowing how to do it isn’t that hard. Knowing when to do it is really hard” — Leadership in a Crisis (quote from FS Blog).

More food for thought: Why Women are Better at Investing from Millennial Revolution. I would generally agree.

On Cashflows & Portfolios, we explored the new Canadian Depositary Receipts (CDRs) being offered by CIBC. Are these CDRs too good to be true???

Tom Drake reviews more cryptocurrency platforms.

My Own Advisor interview and feature

So very nice to be interviewed and featured by the one and only Modern FImily. A big thanks to Court for all the questions and posting my replies. I hope you enjoy the read. To Court and Nic – congrats on the new addition to your family!!

Save, Invest, Prosper with BMO and other Deals

As always, check out my Deals page.

My very own personal BMO promo code remains available!  Use that BMO code to get hundreds in cash back when you open investment accounts with BMO like your RRSP, TFSA, taxable account and more! What’s even better with BMO now is they have commission-free ETF investing. Yup. They are now offering commission-free investing for more than 80 Exchange Traded Funds (ETFs), via their self-directed BMO InvestorLine clients. The ETFs cover a broad range of asset classes, geographies, management styles and popular themes from Canada’s largest ETF providers, including BMO, iShares and Vanguard. Simply awesome and I hope more big discount brokerages follow their lead. 

I’ve got a new partnership with EQ Bank – just look at the banner in the margin! EQ Bank typically offers the best savings account rates in Canada. I hope to park my cash wedge for retirement there!

With 5i Research, take a no obligation FREE trial for your ETF and stock research.

With LegalWills.ca use my personal My Own Advisor promo code for 15% off any services – that never expires.  

I earn $600 in cash back every single year. Scroll down my Deals page to get the same credit card I use in your wallet. 

Reader question of the week (adapted slightly for the site):

Hi Mark,

Love what you do here!

Our RRSPs and TFSAs are now maxed out and we are now looking at unregistered dividend investing. Specifically, I’m looking at the superficial loss jumbo… I understand the general concept that you can’t buy the same stock 30 days before and after you sell it if you want to claim the capital tax loss…

Here is my specific question: could it be a good idea within my new taxable account to buy a stock that we already own in our RRSP (and sell it in my RRSP) – to protect against a possible future loss?

I will explain my thinking. We would sell some stocks (in the RRSP) that went up quite a bit, but we would still like to keep. At least, if things go south, you would be able the claim a tax loss in the future (if we owned that stock in the taxable account). Also, capital gains could possibly be more modest in a taxable account. I’ve read on your site that capital gains, generally speaking, are an efficient form of taxation.

Reading: Investing in Taxable Accounts

I know you are not a certified planner nor tax expert, but I am curious about your thoughts.

Thanks!

Thanks for your kind words about the site and your readership!

OK, interesting approach. Let’s tackle the superficial loss rule.

Generally speaking, you are correct!

The “30-day rule” applies in a taxable account when you sell property/asset for a loss and try to buy back the buy back the property (or an identical property) within 30 days of the sale date. The rules also apply if said asset is repurchased within 30 days by an “affiliated person,” (i.e., spouse (or partner), a corporation controlled by you or your spouse (or partner), or a trust of which you or your spouse (or partner) are a majority interest beneficiary (such as your RRSP or TFSA)).

You can read more details about this rule from CRA here.

Essentially, The Income Tax Act and CRA has implemented special guidelines for a “superficial loss” for a few reasons I can think of. One, the rules were put in place to prevent tax avoidance – the deduction of artificial losses created on paper by people who are not dealing with each other at arm’s length given those rules above. Two, the rules relate to tax-loss selling or harvesting. This is purposeful way of realizing capital losses in your portfolio. I mean, you don’t normally want to “sell low” but doing so might be tax-smart. This makes some sense if you want to harvest losses against huge capital gains/gains you’ll realize in the future. I’ll come back to this point.

If you want to buy a stock in your taxable account, that you already own in your RRSP, to protect against a future loss – that could be a way to manage your investments tax wise.

Then again, I think a tax problem (generally speaking) is a good problem to have.

Question for you: would you avoid taxable investing altogether because you’re worried about future taxation? Maybe some investors would. I am not one of them. Even with my workplace pension, a maxed-out TFSA, and a maxed-out RRSP, I also have a taxable investing account. I have this taxable account because I see it as an additional income stream even though I know there are (and will be more) taxation issues to navigate ahead. I try to avoid letting the tax-tail wave the investing dog per se where I can.

Another thing to consider, why are you investing in a stock or stocks that might have future losses? Although I cannot predict the future either (!), I wouldn’t be investing in any asset that I was legitimately concerned with losses about. I believe that goes against the grain of why people invest in the first place – to realize gains.

I can’t speak to your reasoning but at the end of the day, if you feel your taxable investing is a hedge for a future loss, that’s OK. I just see this approach being a bit more complicated than necessary unless you have a very big bank account to wrestle with. Even then, while heavy taxation is not desired and should be avoided I suspect most Canadians would be thrilled with a tax problem to manage. It means they have plenty of assets to go around.

In closing, based on my understanding, here are a couple of simple ways to successfully realize capital losses and avoid the superficial loss rules. This is not tax advice, just some top-of-mind things:

  1. Assuming it’s not a partial disposition, wait at least 31 days from that settlement date before repurchasing the same investment or an identical property. Easy-peasy!
  2. While you’re dealing with a stock, selling ETFs might be easier. If selling an ETF, consider repurchasing another ETF that invests in the same asset class but might have a slightly different investment mandate (i.e., growth-oriented vs. dividend-focused). Yes, a different ETF but doing in the same asset class can maintain a similar exposure to a desired asset class without waiting for the superficial loss period to elapse.

When it comes to tax strategies, given no guidelines will ever apply to every investor, I would strongly consider you consult with a tax specialist before planning or enacting a tax-loss strategy.

Hope that helps!!

Readers can always check out some of my more popular/frequently asked questions (and my answers) here. 

My name is Mark Seed and I'm the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and I'm now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Subscribe and join the newsletter! Follow me on Twitter @myownadvisor.

21 Responses to "Weekend Reading – Taxable investing and superficial loss rule edition"

  1. Deane Hennigar (RBull) · Edit

    This guy is way disinterested in any of these complicated strategies that “might” work to lever a few more dollars, or not. My head hurts thinking about it. LOL

    Simple, boring, diversified, conservative is my preferred route. Don’t feel I “need” anything else to meet our needs and live fine.

    Reply
    1. Every time I try to talk about investment with my DH, his reaction almost always be “my head is hurting”, LOL. I think I need to write a document to instruct him how to handle all the investments in case something happened to me.

      I am pretty sure DGI investing can meet my needs already. But I don’t mind to try out different investment strategies, it’s like a game, lots of fun. Of course only use play money and risk only what I could afford to lose. As we are still working and have enough nest eggs for retirement already, I got some play money that even if lost altogether, our retirement won’t be affected. My core investment will always be DGI that generates enough income to cover the day to day expenses.

      Reply
      1. Deane Hennigar (RBull) · Edit

        Funny!

        Good idea on that document May. I have an investment policy statement and some instructions there on what my wife should do if I’m gone. I had the same thing but more detailed with my business when I had it.

        Good plan on having fun the way you are with risks largely inconsequential. I’m in a different mindset now with more of a set it and forget retirement strategy. I tinker a little bit but nothing of a lot of importance.

        I like my biggest decision to be when will I get up, how much coffee will I have or how far will I run today. LOL

        Reply
        1. Re: I like my biggest decision to be when will I get up, how much coffee will I have or how far will I run today.

          Such a relaxing life. Hopefully I will be there in ten years. One day I am sure my portfolio will be on autopilot. Right now I feel I am still in my learning curve of investment. You know how things normal work: get complicated first before become simple.

          Reply
          1. Deane Hennigar (RBull) · Edit

            Thanks May. I keep as busy as I want, with a priority on simple, and fun and focus with what I enjoy. I have many hobbies, chores and interests that take a lot of time.

            You’ve learned a LOT. There is no doubt here you’ll achieve whatever lifestyle you want in retirement. Congratulations so far!

            Reply
      2. Love it: “My core investment will always be DGI that generates enough income to cover the day to day expenses.”

        If your portfolio can cover all your day-to-day expenses (soon?) May, well, that’s outstanding. 🙂

        Reply
        1. Basic expenses, not including discretionary expenses like travel, etc. And not considering taxes. As we are not retired yet, none of the dividends will be touched and should continue to grow.

          I have a group RRSP account that will be transferred out to my personal RRSP account and can be used to buy DGI stocks for discretionary expenses.

          Reply
          1. That’s great, re: group RRSP you can move over. Sounds great for DGI stocks.

            Here, nothing much going on. So boring to some degree. Got a few stocks to DRIP in August such as BNS, CM, EMA, TD, TRP among others that should only add to the monthly dividend income update. Other than DRIPping, almost done saving for 2022 TFSAs – another month to go 🙂

            Reply
  2. Why would anyone intentionally invest in stocks to lose money, so they can claim a capital loss? A safer way to almost guarantee a loss is to go to the casino, and watch how quickly it will happen. You won’t get a capital loss, but you might enjoy it.
    I’m leaning more towards investing in a non-registered account after you’ve maxed out your TFSA (and your spouse), especially if one has a company pension. Even if one doesn’t, I keep RRSP contributions to a min.

    Reply
    1. Remember that an RRSP turned into a RRIF is a way to income split with your spouse. I have a defined benefit pension plan, maxed TFSA and using the RRSP turned Rrif to income split with my wife who has a lower income.

      Reply
  3. It’s a very interesting idea to try to harvest capital loss from RRSP account. Here is what I am experimenting: I have CM in my RRSP account. I will always keep CM in my RRSP. But if CM goes down, I would like to have a way to harvest captial loss. So In June, when CM was around $146 (new high), I have sold in my taxable account one cash-secured Jan 2022 put with strike price $145, premium $7.35. If CM keeps going up, $14500 generated $735 capital gain for 7 months, it’s more than 8% annualized, not bad at all. In case CM price goes down on Jan 21, 2022, let’s say to $130, then I will be assigned 100 shares of CM, and by selling it right away, I will realize $1500 – $735 capital loss. If you want, just rinse and repeat after Jan 21, 2022.

    Considering CM is a pretty safe bank stock, if you are doing this in a margin account, you can use half your own money, half buying power. You don’t need to pay any interest before you are assigned the shares. If you sell the shares right away after being assigned, no interest either. This way, you got more than 16% annualized on your money in taxable account. Using margin is not recommended though, be careful with margin calls.

    Yeah, I know, this is rather complicated. I am getting a little bit bored being a buy-and-hold investor and trying to extend my play ground. Maybe I am playing with the fire. LOL.

    Reply
    1. Nice to hear from you May!

      It is an interesting idea…the tax-loss harvesting and can make sense for sure but I would think this is a rather “last resort” option for many investors unless they have a very large bank account.

      Interesting play with CM! Keep me posted if that works out! I’m just DRIPping CM, I recall 3 shares per quarter.

      Reply
      1. Will do. This is actually only part of my experiment. The entire experiment is like this:

        CM price at $146 June 17, then for Jan 21 2022 options:

        1. Sell a Covered call at strike price $150 in my RRSP for $3.68 a share.
        2. Sell a cash covered put at strike price $145 in my taxable for $7.35.

        The outcome would be one of three scenarios.

        Scenario 1. Stock price more than $150 and the stocks called away. I will have $150+$3.68+3*$1.46 = $158.06 in my RRSP, which is a 14% annualized return I would be happy with. Hopefully I can buy CM again under $158. Meanwhile, I pocketed $735 capital gain in my taxable account, which is more than 8% annualized, which I would be happy with too. Much better than the money sitting in a bank account.

        Scenario 2. Stock price less than $145 and I am assigned the shares in my taxable account. I still keep my CM in RRSP and pocketed 4% extra income there. And I harvest some capital loss from taxable account. Remind you CM needs to go down to under 137.65 to cause a loss for me.

        Scenario 3: Stock price ends between $145 and $$150. Both options expire worthless.

        Basically, I don’t see any of above scenarios are too bad. Option 1 and Option 3 both are wins. With Option 2, although it’s a loss, but it actually enables me to harvest capital loss from my RRSP account, which I consider as a tax advanced event.

        Reply

Post Comment