For the passive index investor like me, the objective is to stay invested. In order to do that and not run afoul of CRA's superficial loss rule of not buying back the "identical" property within 30 days before or after a tax loss sale, one key test with respect to ETFs is to buy back an ETF that tracks a different index. 30 days later you can buy back the original ETF if that's what you want to hold for the long run. Each trade costs commission of course, so figure out whether the round trip is worth it as a percentage of the holding.
Here is a starter list of some of the main asset classes where multiple ETFs track a different index but are in the same asset class. The functional test of whether it is in the same asset class is correlation - the same up and down performance - which can be quickly eyeballed using Google Finance and graphing the ETFs in question (see my example chart of US total market ETFs below). To save time and space, I've just identified the ETFs by their stock symbol.
Canadian Equity
- XIU - S&P TSX 60
- XIC - S&P TSX Composite
- ZCN - DJ Canada Titans 60
- CRQ - FTSE RAFI Canada; fundamental indexing will cause returns to differ significantly from the above market cap weighted ETFs
1) Total Market
- IWV - Russell 3000
- VTI - MSCI US Broad Market
- TMW - SPDR DJ Wilshire 5000
- IYY - DJ US Total Market
Source: Google Finance
2) Large Cap
- VV - MSCI US Prime Market 750
- IVV - S&P 500
- SPY - S&P 500
- IWB - Russell 1000
- ZUE - DJ US Large Cap, hedged to Canadian dollars - so returns will differ from above non-hedged ETFs; traded on TSX
- AGG - Lehman US Aggregate Bond
- BND - Lehman US Aggregate Bond
- GBF - Lehman Brothers U.S. Government/Credit (holds both govt & corp bonds)
1) Traded on US exchanges
- VWO - MSCI Emerging Markets
- EEM - MSCI Emerging Markets
- PXH - FTSE RAFI Emerging Markets
- ADRE - BONY 50 ADR
- GMM - S&P Emerging BMI
- ZEM - holds VWO plus other funds, enough to make a substantial difference
- CWO - holds VWO but is 100% hedged
- XEM - holds only VWO but is non-hedged; whether currency exposure difference with CWO counts enough for CRA I cannot tell (and they will, in their inimitable fashion, not tell, if you ask them) but the returns sure will differ
- VNQ - MSCI US REIT
- RWR - DJ Wilshire REIT
- ICF - Cohen and Steers Realty Majors
- IYR - DJ US Real Estate
1) Traded in US
- VEU - FTSE All-World ex-US
- ACWX - MSCI All Country World ex-US
- GWL - S&P/Citigroup BMI World ex-US
- EFA - MSCI EAFE
- ADRD - BONY Developed Markets 100 ADR (large cap)
- IOO - S&P Global 100 (large cap)
- EEN - Robeco Developed International Equity
- XIN - holds EFA only but hedged to Canadian dollar, so returns will differ from above two ETFs
- CIE - FTSE RAFI Developed ex-US 1000; fundamental index - returns will differ from market cap funds
- ZDM - DJ Developed Markets ex-North America ; hedged to Canadian dollar so returns will differ
There are some asset classes where I could not find any reasonable ETF combo alternatives - notably Canadian real estate and Canadian bonds. If anyone has any suggestions, please comment.
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Thanks for your blog! Especially the entries on tax issues with comments from the CRA and pointers to the Income Tax Act. I have some of these issues too.
Regarding the Superficial Loss rules, I recently realized that these rules apply to sales of US currency in US accounts. Every purchase of a US asset like a stock or bond creates a corresponding sale of currency. Every sale of a US asset like a stock or bond creates a corresponding purchase of currency. I believe even spending US currency on vacation is a disposition subject to capital gains rules, including the superficial loss rule, once the overall annual USD currency gain/loss is greater than $200CAD.
Why does the Superficial Loss definition at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/ncm-tx/rtrn/cmpltng/rprtng-ncm/lns101-170/127/lss-ddct/sprfcl/menu-eng.html mention buying the identical property 30 days before selling it? If you buy then sell, I can't imagine how the second condition of holding the property 30 days after the sale can ever apply. Is this to catch fancy maneuvers with options?
I spoke with the CRA this morning and they couldn't give me an example to illustrate the buy 30 days before the sale case. However, I assume that the words are there for a reason and would any suggestions you might have before I try to program this calculation.
thanks
Greg
Anon, I believe the not-30-days-before rule covers the situation where you already own the asset with an accumulated loss and then buy it again before selling. Temporarily you have double the holding and after selling you still own the same asset, so your ownership position hasn't changed. CRA doesn't want you to be able to claim the loss at that time so they simply ascribe the original Adjusted Cost Base to the new holding, as if nothing had happened.
Obviously, it would be crazy to deny a loss when someone buys an asset, it goes down the next day or 30 days later and is then sold at a loss. The folks on the CRA must have misunderstood what you are asking, or maybe the person you spoke with wasn't very expert. One time I phoned and the CRA rep didn't even know what an ETF is!
Though you are right on taking account of the foreign currency gain or loss(even if you do not actually convert the currency at the time of trading), don't think the rules apply to spending foreign currency on holiday. A holiday wouldn't be considered a capital asset.
I have held a fair amount of USD in currency so I rarely completely sell all USD down to 0.
Your example of allowing a loss on buying from 0 then selling to 0 within 30 days seems intuitive. But I studied Math, not accounting... I'm struggling to understand why this result should change if there is already currency. An extreme example: I hold 1USD ongoing, then buy $10000USD and within 30 days sell $10000USD for a loss leaving the original $1USD.
Should I:
- add the loss on 10000USD to the ACB of that $1USD?
- claim a real loss on 9999USD and add the loss on $1USD to the ACB of the remaining 1USD?
If I instead sold 10001USD down to 0 would this then allow the loss?
I think it depends on exactly what "substituted property" means in this definition. I think quantities and levels should count. I visualize the buys and sells as ups and downs on a graph. The buys and sells would be identical to the extent they share the same vertical ranges on the graph. You are comparing holdings at different levels on the graph which makes sense out of the definition but might lead to non-linear results.
As for spending USD on vacation. As far as I can tell USD is always Capital Property, not sometimes Capital Property and sometimes Personal Property. The purpose of the sale doesn't affect Capital Property status as far as I can tell.
thanks again
Greg
http://canadianfinancialdiy.blogspot.com/2007/09/capital-losses-and-superficial-loss.html contains a comment that points to http://www.ctf.ca/articles/News.asp?article_ID=1433 which appears to be referencing http://www.cra-arc.gc.ca/E/pub/tp/it456r/it456r-e.txt as modified by http://www.cra-arc.gc.ca/E/pub/tp/it456rsr/it456rsr-e.txt
"12. The adjustment provided by paragraph 53(1)(f) is more difficult to determine when identical properties (such as shares having the same rights) are bought and sold and some are on hand at the end of the period. When more items are sold than acquired, an allowable capital loss will occur. For example, if a taxpayer having initially 50 identical properties on hand sells 20 items at a loss and reacquires 15 in the relevant period, thus reducing the properties on hand to 45, the superficial loss will be limited to the 15 properties considered to be reacquired. In such cases, it is the Department's practice to allow the taxpayer to consider the superficial loss as being either the actual loss incurred on any of 15 of the 20 items sold or the average loss per item multiplied by 15."
The period is the 30 days before and 30 days after the sale so that all the words in the superficial loss definition have meaning.
Thanks again for your blog, CanadianInvestor. This gets me further towards attempting the calculation.
If anyone has done this calculation I would be interested in what software you used.
Greg
Greg, thanks for the digging. I had forgotten how crazy the superficial loss rule can be, as the example in the Canadian Tax Foundation article points out - by selling half of a losing holding within 30 days of purchase, if you did not own any beforehand, the loss is added to the remaining half. That particular situation effectively forces you to defer claiming ANY loss till you sell everything more than 30 days after the purchase.
The personal/holiday spending would on second thought technically be subject to the same capital gain or loss rules but specific exclusion of any gain or loss under $200 probably would eliminate any such spending from the need for tax reporting. I think it works on each transaction separately, rather than aggregated for a year, for instance, though I am not a tax accountant to know for sure.
The Tax Resource blog, written by an accountant, has a good article on how to handle foreign currency and investments at http://blog.taxresource.ca/exchange-rates-investments-and-income-tax/
Enjoy!
Greg, re the $200 limit on foreign currency, I posted the question on the Tax Resource blog and his reply is that it applies to the total for a year, not the individual transactions. That sure makes bookeeping complicated and onerous just to figure out if you need to report or not for people who spend a lot of time and money in the USA.
Document No.: 2005-0150811E5 (E)
Author: Claude Tremblay G
Document Type: Interpretation - external
Reference Date: November 30, 2005
Subject: Superficial loss on security transactions
Section Ref.: 38(b), 40(2), 54 superficial loss
from
Financial Sector and Exempt Entities Division, Income Tax Rulings Directorate, Policy and Planning Branch
clarifies that the period is actually 61 days, i.e. 30 days on each side of the sell date. I haven't found the formula posted on the CRA web site. I'm writing to the Rulings Directorate to find out if there are any further changes since 2005.
Your first instincts about initially buying a property then selling it within 30 days were correct:
start quote
Your second enquiry asks whether the initial purchase of a security that is followed by a partial
disposition at a loss within 30 days after the initial purchase would be considered a superficial
loss, which would be added to the adjusted cost base (the "ACB") of the remaining shares/units.
Your question refers to an initial purchase. The superficial loss provision requires an acquisition
of substituted property that is identical to the property during the period that begins 30 days
before and ends 30 days after the disposition and at the end of the period, the taxpayer or a
person affiliated with the taxpayer own or have a right to acquire the substituted property. In
your example, there would need to be a secondary purchase after the initial purchase in order for
the provision to apply. Further, if the taxpayer or a person affiliated with the taxpayer does not
own the same property or an identical property (the "substituted property"), or does not have a
right to acquire such property, at the end of the 30-day period following the disposition the loss
would not be a "superficial loss".
end quote
http://www.cra-arc.gc.ca/E/pub/tp/it95r/it95r-e.txt is pretty clear that purchases in foreign currency are subject to capital gains calculations.
I believe that that all currency transactions across all currencies fall under the CAD200 annual limit, so that once you exceed the $200 limit due to an investment account you should be tracking all your vacation spending in all currencies. You are very likely making losses on vacation exchange rates so it's probably to your benefit, if you can endure the accounting and the inevitable superficial loss calculations.
I'm now trying to figure out how to account for currency capital gains on USD margin transactions. Also with multiple USD accounts it is impossible for me to absolutely order currency transactions across multiple accounts on the same day. And Capital Gains calculation is order sensitive...
Thanks for the blog pointer! Although it doesn't get quite this detailed, it could be a place to post these issues. I will try the Rulings Directorate first.
Greg
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