Tax-loss selling can be worthwhile
Kevin Johnston
The Leader-Post
Saturday, December 15, 2007
On Tuesday, the U.S. Federal Reserve Open Market Committee cut interest rates by a quarter of a per cent.
Investors punished the Fed by sending the TSX down 216 points and the Dow Jones down 294 points.
Clearly, the market rendered its verdict and gave the Fed's modest rate cut a big thumbs down.
The Fed cut its key fund rate to 4.25 per cent and trimmed a quarter point off its discount rate, which it charges for direct loans to banks, to 4.75 per cent.
Many market participants were calling for a 50-basis-point cut to both the Fed funds rate and the discount rate.
Given the recent volatility in the market, it is now a good time to look at your portfolios for "tax loss" opportunities.
With the issues in the credit markets and the weakness in the U.S housing markets, investors may find more opportunities to crystallize losses than in the past few years.
Tax-loss selling can be defined as selling a portion with, or without, the intention of buying it back after 30 calendar days to create a capital loss that may be used to offset taxable capital gains in the following ways.
Investors may carry back losses to one of three previous years to offset any capital gains in those years and recover some of the capital gain tax they have previously paid.
Investors may also carry forward losses indefinitely to offset capital gains generated in the future.
Investors should look at positions where the fundamental outlook for the company and its relative return potential have declined or remain unattractive.
Where the outlook is positive, investors can repurchase the security after the requisite 30-day restriction period.
Tax-loss selling is also able to give an investor the opportunity to rebalance a portfolio or switch from one industry group or asset class to another.
The final day to realize a Canadian loss on a security is Dec. 24.
For a U.S position, it is Dec. 26 this year.
In Canada, the top 10 worst-performing stocks in order are:
Quebecor World
Mega Brands Inc.
Cinram International Income Fund
Gabriel Resources Ltd.
Neurochem Inc.
First Calgary Petroleums Ltd.
Cott Corporation
Gammon Gold Inc
Angiotech Pharmaceuticals Inc.
ATS Automation Tooling Systems Inc.
- Kevin Johnston is branch manager and associate director of ScotiaMcLeod in Regina. The author is an employee of ScotiaMcLeod, but the views expressed are his own.
