Harvesting Tax Losses

If you have capital gains that you have incurred in 2019 in the non-registered part of your portfolio, you might consider taking some tax losses by selling investments that are down so that you can take a capital loss to offset your 2019 gains and reduce your tax burden.

Tax rules state that you cannot buy that same security back for another 30 days in order to maintain the capital loss. However, you can replace it with a similar security, perhaps another ETF of like holdings so that you don't miss out on the possible recovery of that asset or asset class.

You should talk directly with your advisor on this matter, in order to do what is best for your own portfolio and tax situation, but with the preferred share ETF down some 15% over the last couple of years, this may be one area of opportunity.

High Rock private clients have had very little exposure to preferred shares, but the volatile interest rate environment has certainly created some problems for the rate-reset preferred share markets in Canada. Sometimes you have to weigh the risks of a higher dividend yield (like that which preferred shares offer) against the potential downside. CPD (above chart) offers a very attractive 5% dividend yield, but a 15% decline in value and a 0.5% MER, leaves you well into the negative. Sometimes having an exposure to a money market fund (cash equivalent) that pays 2% becomes a smarter option. I would take the 2% over the -10%, any day. That being the case, because I /we invest in the exact same securities as our clients (which is not always the case in the advisor community), our cautious stance, can have, in time, its benefits. We manage risk first, with a view to providing protection to our and our client portfolios capital when it appears to be at higher than normal levels of risk.

Canadian High Yield bonds have also been a better risk-adjusted asset class, with little correlation to interest rates and / or stock market volatility: (TXPRAR is the TSX preferred share index). Annualized Standard Deviation = Risk.

The one thing to be weary of, and the reason to be asking for assistance / advice on the tax-loss harvesting, can be the timing. If lots of folks are running to the same exit, it may get a bit tricky and could artificially and temporarily push prices lower. That being said, it may also provide buying opportunities for those who have cash / cash equivalent.