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Tax Loss Selling Results

When life gives you lemons, make lemonade.  That’s how our team in Toronto has been reacting to the recent market volatility.  In the context of this common phrase, the lemons are the stock market losses and the lemonade is the deferred capital gains taxes.  Shortly after announcing our company’s new tax loss selling software, we initiated the following tax loss selling trades for a few of our clients.

September 30:  Switched the DFA Canadian Vector Equity Fund Class F (DFA600) to the DFA Canadian Core Equity Fund Class F (DFA256).

By switching from the primary fund to the secondary fund, we realized the capital losses while maintaining exposure to the Canadian stock market.  The trades settled on October 1 (T + 1).  **Note:  Generally, ETF and stock trades settle on T+3**

As of September 30, 2014

Primary Fund Units NAVDFA600 / NAVDFA256 Total Cost ($) Total Proceeds ($) Realized Loss ($)
DFA600 6,252.874 10.45 / 18.84 $70,720 $65,343 -$5,377
DFA600 9,151.786 10.45 / 18.84 $102,500 $95,636 -$6,864
DFA600 8,788.958 10.45 / 18.84 $98,700 $91,845 -$6,855

Sources:  PWL Capital, Dimensional Fund Advisors Canada ULC

October 2 to October 31:  

During this 30 day period, we held onto the secondary fund (DFA256) in order to avoid the superficial loss rules (which would take effect if we switched back to the primary fund too early).

One risk of switching from the primary fund to the secondary fund is that the secondary fund may lag the primary fund during the 30 day period.  In this particular instance, the primary fund dropped by an additional 6.22% during the holding period, while the secondary fund only dropped by 4.03%.  In other words, the clients received a boost in their returns because of the switch, which ended up being worth $1,429, $2,090 and $2,008 respectively (relative to if we had simply done nothing).  Please keep in mind that the opposite scenario could have also occurred (which is why it is so important to choose secondary funds that have a low expected tracking error relative to your primary fund).

October 31:  Switched the secondary fund (DFA256) back to the primary fund (DFA600).

As these trades settled on November 3 (T + 1), we avoided the loss being deemed as superficial.  These trades also triggered more capital losses.  In hindsight, it would have been more advantageous to have sold the primary fund and left the proceeds in cash for 30 days.

As of October 31, 2014

Secondary Fund Units NAVDFA256 /NAVDFA600 Total Cost ($) Total Proceeds ($) Realized Gain/Loss ($)
DFA256 3,468.287 18.08 / 9.80 $65,343 $62,707 -$2,636
DFA256 5,076.221 18.08 / 9.80 $95,636 $91,778 -$3,858
DFA256 4,875.000 18.08 / 9.80 $91,845 $88,140 -$3,705

Sources:  PWL Capital, Dimensional Fund Advisors Canada ULC

By the end of the process, our three clients realized total capital losses of $8,013, $10,722 and $10,560 respectively.  They can use these losses to offset gains in the current year, and then carry them back up to 3 years.  If they have no gains to offset them with, they can carry them forward indefinitely.  There was also the added benefit that the secondary fund outperformed the primary fund during the 30 day period.

5 Responses to Tax Loss Selling Results

  1. Curt 08/12/2014 at 1:42 pm #


    Can I sell XEI (iShares S&P/TSX Composite High Div Idx ETF) for tax loss selling purposes… Meanwhile picking up common shares of an individual company that is a component of that basket… Or does that initiate the superficial loss rule? Thank you.

    • Justin 08/12/2014 at 4:19 pm #

      @Curt – if you purchased an underlying stock held by XEI anytime during the 61-day period, the superficial loss rules would generally not apply. You could also consider replacing XEI with a similar but not identical Canadian dividend ETF (in order to lower your single security risk, and possibly your monthly tracking error).

      • Curt 09/12/2014 at 12:44 pm #

        Thank you for the clarification. I thought I may have botched my whole tax loss selling plan. That whole “identical property” language is confusing… Appreciate it!

  2. Eric 06/07/2015 at 12:33 pm #

    Is Tax loss selling any use for a buy and hold investor? Let’s say you keep buying more of your ETF’s over 20 years and you only do cash flow rebalancing through sizable new investment funds each year (rather then selling some assets). Wouldn’t the value generally go up over time so much that if you had a loss over a one year period, wouldn’t that typically be smaller than the gains you have had over the last 10 years, say? Or would you have to keep track of individual, fairly recent investments in the ETF to match the losses to purchases that were closer to today’s prices (lower).

    The reason why I bring this up is I have been wondering whether a fund like VXC limits you in the amounts of tax loss selling you could realize (when Europe down but U.S. up, etc). But then if you buy and hold long term with cash flow rebalancing, then maybe tax loss selling is no use anyway?


    • Justin 07/07/2015 at 10:45 am #

      @Eric – if you happened to purchase an ETF at a market bottom (like in 2009), you may not have had any opportunities for tax loss selling. Some investors may get around this by purchasing different ETFs within the same asset class with new contributions, in order to have more of a chance to realize losses on that particular security (that they can use to offset gains when they rebalance their portfolio).

      If an investor is constantly adding new funds to the portfolio, they may not have to rebalance often, and tax loss selling would have less of a benefit.

      In reality, I haven’t met many DIY investors who attempt to harvest their losses. If an investor today has made the decision to switch to a passive strategy and sells all of their active funds at a significant gain, it would be wise to consider putting together a tax loss selling plan in order to recapture and defer the taxes paid.

      A fund like VXC would have less opportunities for tax loss selling, but if they did arise, it would be the easiest to implement (i.e. sell VXC and buy XAW).

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