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!!

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. 

Mark