Well, Thanksgiving is here, and the cooler autumn temperatures have arrived just in time. Thoughts turn to family dinners and taking drives through the country to admire the colours. The origins date back hundreds of years to when Canada’s indigenous peoples gathered to rejoice over the harvest, as well as celebrations by early French and European settlers over the season’s bounty.  It is around this time of year that we start to look at our non-registered investment portfolios for a different kind of harvesting – the tax loss variety. We do so in order to find opportunities to offset capital gains realized over the course of the year, or to go back and recover tax paid on realized gains during the prior three years. Doing so now gives us time to put strategies in place well before year-end.

Just as a refresher, the process starts with generating an interim gain/loss report for an account that shows the sells that have taken place since the start of the year. If we are dealing with a corporation, it would be from the beginning of the company’s fiscal year. At the bottom of the report, assuming anything has been sold in the account during the period, we will have either a net realized gain or a net realized loss. If the latter, we need not have to take any action and the same holds true if a net gain is relatively minor.

If the gain is substantial, and your tax professional believes something should be done to lower it (for example, it might push one’s income past the threshold where OAS begins to get clawed back), then we look at the portfolio today for any unrealized losses that could be triggered or harvested in order to lower the net gain for the year. Before doing so, however, it is important to find out from your tax professional whether there is any tax loss carry forward balance from prior years. Remember that if you realize a loss in any year, it can be carried forward indefinitely and used to help offset a gain in a future period. It is possible that if such a loss carry forward exists it might negate the need for any tax loss harvesting. For now, let’s assume there are no losses to apply, such that the net realized gain to date stands.

One of the reasons for putting a strategy together now partially stems from the tax code. Under current rules, if we trigger a loss for the purpose of reducing or eliminating a capital gain, we cannot re-purchase the security sold for 30 days.  Failure to adhere to this time frame will trigger the superficial loss rule and it will not be eligible to be applied against the gain. If the security is something we ultimately want to keep holding over the longer-term, then selling it now gives us time to buy it back before year-end. We have discussed the mechanics of this strategy in the past, so I won’t go through it again but outside of how we apply this strategy is the core issue of whether there are any losses to harvest in the first place.

Stocks this year have performed better than what most expected at the start of the year and certainly back in April when Trump unleashed his tariff storm.  The above chart shows the TSX, S&P500 and Euro Stoxx indexes this year.  While there were likely some losses in the portfolio back in April, those would have dissipated as the recovery took hold, potentially reducing or eliminating opportunities for tax loss harvesting before the end of the year. Now, if positions were not sold before the storm or deeper into this rally, then there may not be any gains to offset. But what if there were?

Of course, losses can pertain to more than just stocks. Bonds, preferred shares and commodities (or ETFs and funds that invest in them) could be in the red and therefore offer an opportunity for tax loss triggering. While the above chart looks only at this year, the reality is that whether a security is in a gain or loss position depends on its market value now and when it was bought. A quick side note.  If you bought a mutual fund and its dividends are reinvested in the fund over time, the average cost of that fund could be higher or lower than the original purchase cost depending on if the fund’s net asset value (NAV) was rising or falling as those dividends were reinvested. For now, let’s ignore funds in this discussion and focus solely on stocks.

On the assumption that stocks tend to follow a long-term upward trend, it suggests that there would be a relatively smaller probability that a stock purchased a long time ago would be in an unrealized loss position today. Again, if you bought at the peak of a prior cycle, then that probably could be higher. Vice versa, if you bought at the trough, there would be less chance of that being the case, generally speaking. One way we can look at this is by examining what stocks are still trading at a loss today over various periods.

Using the S&P/TSX and S&P500, I looked at the individual constituents over a 1-year, 2-year, 3-year and 5-year period and sorted them according to price performance. In the case of the TSX, there are 52 companies that are trading lower than where they were a year ago, compared to about 30 over the smaller periods. Some of these are common blue-chip names that many investors would have in their portfolio. Think BCE, Teck Resources, and CNR. Even though the TSX is up around 25% over the year and a majority of its members are also up, it is possible that if someone had bought any of the 52 names this time last year, they would have losses. Note, the 5-year time period takes us back to the pandemic year of 2020, when stocks were still recovering from the sharp drop in March. No surprise then that the number of companies in the red (29) is lower, when the TSX has gained 84% over this timeframe.

If we shift to the S&P, the picture is similar though the scale is different.  Over the past year, 231 names on the index are down, versus an overall lift of about 16% in the index. This list would include some major declines, like Dow, Moderna and Target. If I extend out to 5 years, we find 108 companies trading lower today, with Moderna and Dow also in that list. This is also representative of the fact that the S&P500 has experienced very narrow leadership, especially over the last three years.

When we are talking about gains or losses in U.S. stocks, keep in mind that the exchange rate plays a very important role. For example, even if a stock is down in price over a certain period, if the Canadian dollar had appreciated against the U.S. dollar by the same percentage, there would have been no change and therefore no loss.

Still, it might be the case that there are no losses whatsoever in the portfolio to harvest in order to offset gains crystallized this year. Considering that retail equity exposure, especially in the U.S. market, has become extremely overconcentrated in a relatively small number of stocks, this can also explain why unrealized losses may be scant. In the above chart, we show the so-called MAG 7 index (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) and even if one had bought in to these seven companies at the peak last December, there still would not be a loss after the post tariff tirade recovery.

Then again, there may be those who have had this concentration and who have not sold into this rally. On the one hand, we don’t have a capital gains problem to deal with, and it takes me back to discussions I had with individuals back before the tech bubble pop in early 2000. Even before it was known that the company’s books were shall we say off-smelling, the company’s share of the TSX had grown to ridiculous levels. Regular everyday Canadians had become millionaires on paper and, while I was not in the retail advisory business at the time, I would suggest that taking some off the top might make sense. The response was usually “why would I do that and pay all those capital gains taxes?” The market then became the cheapest accountant they could ever hire. Capital gains problem solved.

In the current environment, there has been more talk of this being yet another bubble that could suffer the same fate as what we saw in 2000. Even if we assume that none of the high-flyers are going to reveal accounting irregularities or even just an overly optimistic guidance of future revenues and earnings, there is a good case to be made for examining one’s exposures relative to their objectives, strategic asset allocation targets and degree of portfolio diversification. Just because there are no tax losses to harvest, weighing the difference between paying the lowest form of tax on money made versus the alternative of a portfolio loss might just provide a reason to be thankful later.

On behalf of the Pyle Wealth Advisory team, have a wonderful weekend.   

Andrew Pyle