Gains from Theft are Taxable and Claiming Fraudulent Scheme Losses

The Canada Revenue Agency has just published an updated tax folio describing how thieves should declare gains from theft (it's taxable income), or losses (deductible!).

Perhaps more relevant to law-abiding blog readers it also says business can deduct losses from theft by strangers, or employees ... but not business partners (how dainty, it's termed a capital withdrawal).

And finally, to add to the woes of those investors who have been victims of a fraudulent investment scheme, the folio describes some tax relief, but it looks complicated enough that professional help is likely to be required to report income tax correctly.

UFile Tax Software Giveaway!

It's tax season and those receipts should be flowing into your inbox or mailbox. Here's an opportunity for blog readers to ease some of the hassle of doing taxes by taking advantage of a giveaway from one of the leading tax software providers. The software will let you prepare and file online electronically on Canada Revenue Agency's NETFILE tax submission service. 

Thanks to UFile, I am giving away five codes for the online web version of their personal tax preparation software for Canadians. That's a value of $15.95.

Here are the details of the giveaway:

• To enter, submit a comment on this post below - Though you don't have to, I'd be interested in your comments on tax prep software since I am again working on my annual review of all the CRA NETFILE certified packages; use a unique name (Anonymous won't suffice!) so I can distinguish people
• One entry per person please
• Entries close Tuesday, March 4th midnight EST
• I'll do a random draw of five (5) names from amongst the entries after the deadline
• Winners will be announced on the blog and asked to contact me via email with their own email address so I can reply with the code to enter in the UFile tax software (your email will not be used for any purpose other than to contact you as a winner)

Good luck! 

H&R Block Tax Software Giveaway

Now that RRSP season is over, it's time to start thinking of preparing a tax return for 2012 even though the deadline for submission is a seemingly distant April 30. The Canada Revenue Agency's NETFILE online tax submission service is open for business and the CRA is ever more enthusiastic to receive the return via electronic means instead of on paper.

Thanks to H&R Block, I am giving away three codes for the online web version of their personal tax preparation software for Canadians. That's a value of $13.95 up to March 13 and $15.95 thereafter.

Here are the details of the giveaway:

• To enter submit a comment on this post below - though you don't have to, I'd be interested in your comments on tax prep software since I am again working on my annual review of all the CRA NETFILE certified packages (last year's review here); use a unique name (Anonymous won't suffice!) so I can distinguish people
• One entry per person please
• Entries close Tuesday, March 12th midnight EST
• I'll do a random draw of three (3) names from amongst the entries after the deadline
• Winners will be announced on the blog and asked to contact me via email with their own email address so I can reply with the code to enter in the H&R Block tax software (your email will not be used for any other purpose than to contact you as a winner)

Good luck!

UFile Giveaway Winners

The draw has been done. Congratulations to these three winners of the giveaway: IG, Aidan and Be'en. Please contact me via the "email me" link in the right hand sidebar and I will send you the code to enter to use UFile for free.

UFile Tax Software Giveaway

Here's an opportunity for all the last minute tax filers to use UFile, one of the packages I rated highly recommended in my annual review last week. UFile has been one of the best packages ever since I started doing assessments several years ago.

Dr Tax, the makers of UFile, have supplied me with three codes for the online web version of UFile to give away to blog readers. With the code you can prepare your taxes for free, a value of $15.95 for an individual return, or $24.95 for a family (spouse and dependents).

This is how the giveaway works:

• To enter submit a comment on this post below - though you don't have to, I'd be interested in your comments on tax prep software; use a unique name (Anonymous won't suffice!) so I can distinguish people
• One entry per person please
  
• Entries close Friday, April 20th midnight EST
• I'll do a random draw of three (3) names from amongst the entries after the deadline
• Winners will be announced on the blog and asked to contact me via email with their own email address so I can reply with the code to enter in the UFile software (your email will not be used for any other purpose than to contact you as a winner)

Best of luck and remember to file by the deadline of April 30th. UFile, like the other NETFILE certified packages, lets you do it online quickly and conveniently.

TurboTax Giveaway Winners

The draw announced last week for the three packages of online web-based tax preparation software courtesy of TurboTax has been done and the winners are:

• Skip
• JonE
• Pandaincanada

Congratulations!! To claim your prize please contact me via email using the "email me" link under Have a question or an idea for a blog post in the column on the right hand side of the blog. I will send you the code that is good for any online version of TurboTax. The code is entered at the end of your data entry when you are ready to file and the payment step comes up. Your email address will not be used for anything else.

Thanks to all for participating and may your 2011 tax preparation be painless and quick. Again, thank you to the folks at TurboTax.

TurboTax Online Web Software Giveaway

The Canada Revenue Agency online tax submission service is open for business and the receipts we need to prepare a tax return are being mailed out these days (see a timetable for this tax year here). The tax software vendors are ready too.

Thanks to Intuit, the makers of TurboTax, I am giving away three codes for any online web version of TurboTax. That's right, prepare your taxes for free, a value of $17.99 for the Standard version, or $32.99 for the Premier version (adds investments and rental income) or up to $44.99 for the Home and Business version (contract worker or self-employed) .

Here are the details of the giveaway:

• To enter submit a comment on this post below - though you don't have to, I'd be interested in your comments on tax prep software since I am again working on my annual review of all the CRA Netfile certified packages (last year's review here); use a unique name (Anonymous won't suffice!) so I can distinguish people
• One entry per person please
  
• Entries close Friday, March 2nd midnight EST
• I'll do a random draw of three (3) names from amongst the entries after the deadline
• Winners will be announced on the blog and asked to contact me via email with their own email address so I can reply with the code to enter in the TurboTax software (your email will not be used for any other purpose than to contact you as a winner)

Good luck, everyone!

Humongous Provincial Tax Credits for Student Graduates

Know any recent graduates who can use special income tax breaks worth up to $25,000?

Publisher CCH's tax newsletter for December describes these significant tax incentives for student graduates in Tax incentives for Post-secondary graduates. The article gives more detail, and links to each province's program, but here are some key points:

• applies to any college or university graduate
• takes form of tax credit or rebate of provincial income tax, so you must live in the province
• are Not tied to graduates who are originally from that province or who attended school there (not necessarily even in Canada), i.e. they are designed to entice recent graduates to live and work in a province ... call it the "brain scoop by tax" strategy
  
• pay out over several years
  
• for year 2000 graduates onwards, varying by province
• Only in Saskatchewan (up to $20,000), Manitoba ($25k max), New Brunswick ($20k max), Nova Scotia ($15k max), Quebec ($8k max)
• claim is not necessarily made (e.g. not in N.B.) through the normal income tax return; it varies by province, so graduates need to check, and perhaps apply separately, to be sure to get it. It's a good check item to add to my review list, for provinces like N.S., where the claim is made on the tax return, when I do my annual online tax software ratings.
  

Thanks to CCH for the lovely pre-Christmas gift of valuable information.

Ontario Government EATs the Dead

It's gruesome. As of January 2013 the Government of Ontario will voraciously EAT dead people, or more precisely, their estates. That's EAT as in Estate Administration Tax, the official name for probate fees in the province. The Government of Ontario has passed into law big changes in the Estate Administration Tax (EAT) and though the tax rate will remain the same, the new provisions for collection will make it a nightmare.

The innocuously titled Ontario to Change the Way it Collects Estate Administration Tax (Probate Fees) by Clare Sullivan, Aird & Berlis LLP in CCH's August 2011 newsletter describes the additional bureaucracy:

• "... the new provisions require the estate representative to keep records and books of account ... the value of the assets of the estate for probate or administration purposes will have to be supportable ... valuations will be necessary for all property passing under a probated will" >>> i.e. extra effort, time and cost to get formal assessments on everything
• "... The MNR will be able to assess or reassess for a period of four years after the day the tax is payable... The new procedures may also unduly delay the application for a certificate of appointment [my note - this is the document an executor needs to show everyone that he/she is legally entitled to be executor] ... there could be significant delays in obtaining the certificate of appointment and thus delays in administering the estate ... an estate representative may not wish to settle an estate until four years after the application for probate in order to limit his or her personal liability for any unpaid tax" >>> i.e. potential lengthy delays for someone to even getting started as executor. The Catch-22 lunacy of this is that without the certificate of appointment many/most financial institutions will likely refuse to provide any information, which of course can make it impossible to pay the tax and get the certificate. And then there will lengthier delays - goodness knows it takes long enough now - to wrapping up and distributing estates. And even after that, there might be messy reassessments and more to pay later.
  

Another lawyer, Barry Corbin, goes into more detail about increased liability exposure and complications of distributing estates as a result of the audit and compliance provisions of the new law - see Estate Administration Tax - The Nightmare Begins.

One thing is certain - the Ontario Ministry of Revenue will make sure to collect a lot more tax than now (why else would they have done the amendments?), merely from its rigorous and likely painfully painstaking application of the law. Moreover, with the structure in place, down the road one can expect increases in the already highest in Canada rates (see Canadian Tax Resource blog's table). Just wait till the government needs more money and finds that dead people are easier targets than live voters.

It's a done deal. The new law received Royal Assent May 12th. Of course, the government could forget to Proclaim the law, and it would never go into force. Maybe an election would see a new government that would see fit not to take that final step.

Governments' New Extraordinary Data Snooping Powers into Offshore Tax Havens

It used to be under older style tax treaties that countries like Canada going after their taxpayer citizens hiding their money in offshore tax havens could only request the data the foreign country had at its disposal in the normal course of doing its own government administration, which conveniently would normally be very little in a tax haven.

The new breed of tax agreements that are progressively being forced upon the tax haven countries contains a far more intrusive power. The snooping country Canada can request in Article 4 that the tax haven country like Jersey (see Finance Canada's announcement) to actively collect and compile information! And by the agreement, the tax haven country agrees to collect it and hand it over.

" If the information in the possession of the competent authority of the requested Party is not sufficient to enable it to comply with the request for information, the requested Party shall use all relevant information gathering measures necessary to provide the requesting Party with the information requested, notwithstanding that the requested Party may not, at that time, need such information for its own tax purposes."

It's hard to tell how many tax havens are affected so far but the steady flow of new agreements (e.g. Cayman Islands, Bahamas, Isle of Man, Bermuda, three of which are in a recent list of best places to open an offshore account on the Offshore Tax Haven blog) and the fact that the OECD countries back this thrust, suggest it will be more and more difficult to hide from the tax tentacles of governments the world over.

update Jan.19 ... and today Guernsey joins the list

How Taxes Increase Inflation's Effect as a Return Killer

Income tax reduces investment returns. Inflation does too. Together they enhance each other's effect in quite dramatic fashion that surprised me when I did some simple example tables.

First, to be a little technical but more precise, whereas the rule of thumb to figure real returns net of inflation is to take a nominal return and subtract inflation, the more accurate formula divides (1 + nominal return) by (1 + inflation) as Wikipedia explains in the article on Inflation Tax. Our calculations below use the precise formula. When inflation is low the difference between the approximation and the precise formula is very small but at higher returns and inflation rates, the difference can be substantial, which comes out in the tables below.

Here is the first table (click to see it large). Observe that:

1. Taxes make the investor a net loser even when nominal returns equal inflation. The yellow highlighted cells on the diagonal show nominal return equal to the inflation rate. In every cell except where both are zero, taxes on the nominal return eat up part of the inflation compensation. The higher the inflation, the worse it gets and the more taxes reduce returns. As we see sliding down towards the right e.g. when both nominal returns and inflation are 8%, someone at the 40% tax rate of this table actually loses 3.4%!
2. Taxes can result in negative real after-tax returns even when nominal returns exceed inflation and again it gets worse the higher the inflation rate e.g. a 13% nominal return would not be enough to make a net gain when inflation is 8% in the bottom right corner. Another of looking at this is to note case A) (the cells highlighted with a blue border), where a combination of nominal pre-tax 4.47% return and 0% inflation equals the net return of the much wider 6% spread combo of 8% nominal and 2% inflation.
   
3. Note how the GIC-zone of 1 to 3% current rates (per Canoe Money) within Bank of Canada target 1% to 3% inflation is pretty well entirely in negative red returns for a 40% tax rate. And it's true for more or less the whole gamut of tax rates as our other tables for 46% (posted below) and 25% (not posted here but I did the numbers) tax rates show.
4. Net returns are higher in low inflation even when pre-tax real (after inflation) returns are the same e.g. in case B) the real pre-tax return of 5.88% equals the 8%-2% combo but the 5.88% - 0% combo would produce 3.53% real after-tax versus only 2.68%.

The second table shows the effects at the highest Ontario marginal tax rates of 46.21%.

1. Net returns are even worse at the higher tax rate, not a surprise, as there is more red / negative returns and lower numbers throughout the table.
2. The spreads necessary to make money are even more accentuated at the higher tax rate - it takes more difference between nominal returns and inflation to compensate when the tax rate is higher e.g. whereas at 40% tax, the 6%-0% combo could be equalled by the 9.58%-2% combo, at 46% it takes 10% nominal to be equal at 2% inflation (case E) the green framed cells).

What defences and counters are there? Apart from praying and maybe doing a little political lobbying to have government set even lower inflation targets (noting however, that when the investor loses from taxes and inflation, the government is a big beneficiary), the basic strategy is to defer taxes as long as possible:

• Though one cannot escape the effects entirely with registered accounts since taxes must eventually paid upon withdrawal, using registered accounts for tax deferral becomes even more important the more inflation rises;
• In taxable accounts, trade less to avoid realizing capital gains, buy and hold with index funds (on page 71 of Jeremy Siegel's Stocks for the Long Run that shows how the inflation tax effect on capital gains lessens progressively with longer and longer holding periods; hat tip to Siegel as well since that is where the idea for this post came from).
  
• Pick funds or ETFs for taxable accounts like the new Horizons BetaPro S&P/TSX 60 Index ETF (symbol: HXT) (reviewed here) that produces no immediate taxable distributions.
• In taxable accounts, seek returns from lower tax rate types of income - the lowest being dividends, then capital gains, with interest the last choice (Canadian real return bonds have the unpleasant feature that the inflation adjustment component is just as taxable as the real return portion, as Bylo Selhi notes here)

It used to be that only death and taxes were inevitable. Unfortunately, inflation is too nowadays, so we need to be aware of its toxic effects.

Outdated CRA Tax Bulletins and New taxwiki.ca

Something is wrong with this picture: the Canada Revenue Agency wants us to do our taxes honestly and accurately but it deliberately neglects to provide up-to-date information and instructions through its Interpretation Bulletins. U of T law professor Ben Alarie noted this alarming and infuriating practise (which he notes was confirmed by the Auditor General) in Prof. Ben Alarie on Taxwiki.ca. If the CRA knowingly allows IB's to fall out of date, what about the rest - how is the ordinary taxpayer able to use any of CRA's information with any confidence?

Prof. Alarie is responding by launching taxwiki.ca as an online source of updated Interpretation Bulletins and other Canadian tax materials. Like other wikis, it will be publicly-editable so that everyone can add material as they encounter the intricacies of taxes through their personal experience. The added value potential of the taxwiki over and above the updating issue is that it can go beyond the strict tax rules to explaining whether this or that specific set of facts fits into, or not, the eligibility for beneficial tax treatment. For example, as someone who spends a lot of time overseas I found that the IT 221- Determination of an Individual's Residence Status page provides a lot of meaty explanation on the topic.

Of course, quality and accuracy is critical and Prof. Alarie hopes to achieve that by monitoring the content himself (he is a tax specialist) and by recruiting other tax experts as the project grows. There is already substantial detailed content on taxwiki so it is off to a promising start. But as Prof. Alarie said is his email to me announcing the project "... the whole idea is to allow for many hands to make light work for the benefit of all. The benefits of a wiki are magnified as more and more users refer to, modify, update, and streamline its contents." I will give it a shot myself by putting in some of the details encountered in the process of doing my annual online tax software review. A permanent organized repository is a far better place to find tax info than a blog archive, whose past material becomes hard to find, even with Google search ( I sometimes have trouble finding stuff of my own despite knowing I wrote about it!).

Good on the prof for launching taxwiki. Instead of merely whining about the CRA, he's done something positive. As the proverb says, "If the mountain will not come to Mohammed, then Mohammed must go to the mountain."

Canadian TaxPayers' Ombudsman Office

Fellow blogger Michael James' post today about his hassles with the Canada Revenue Agency reminded me that I received an email recently from a relatively new government service for aggrieved Canadian taxpayers - the Office of the Taxpayers' Ombudsman.

Here is a chunk of their email to me:
"Canada’s Taxpayer Bill of Rights was expanded in 2007 to include eight service rights. Mr. J. Paul Dubé was appointed as Canada’s first Taxpayers' Ombudsman in February 2008 to uphold these eight service rights by ensuring that taxpayers get professional service and fair treatment from the CRA.

In that light, the Office of the Taxpayers' Ombudsman plays an important new role by providing independent and impartial reviews of complaints about how the CRA serves and treats taxpayers. The Office also addresses systemic problems that affect large numbers of taxpayers.

Attached is an electronic version of our Interim Report as well as our first Annual Report. As they demonstrate, the activities of the Office of the Taxpayers' Ombudsman have already resulted in a number of disputes between taxpayers and the CRA being resolved. It provides a few examples of the types of cases in which we have made a difference in the lives of taxpayers. As a result of our intervention, the CRA has:

* issued apologies;
* released bank accounts they had seized;
* cancelled penalties and interest they were charging;
* reviewed some of its internal policies and procedures; and
* in some instances, ended collection activities.
...
Additional information is available at: http://www.taxpayersrights.gc.ca/mssg-eng.html." The complaint form can be downloaded here.

UFile Online Web Tax Software Giveaway

Got all those receipts and tax slips together yet? Ready to start entering the data? Even if you have already filed, you may want to check your answers since some packages optimize credits and deductions better than others and legitimately calculate less tax to pay. You can always file an adjusted return to get money back from the CRA.

UFile has generously donated to this blog five access codes to use with the online version of its tax preparation software, which can be used to either file electronically through NetFile or to print out a paper return for mailing in. Last year, UFile was my top pick amongst all the online packages. This year's update will be out very soon, so keep reading to see who gets top marks this year.

To enter the giveaway leave a comment on this blog post under a unique name - so I can tell people apart - by midnight eastern time this coming Sunday, April 11th. I will then do a random draw announcing the five winners on the blog, who will be asked to contact me by email (winners' email will be used only for the purpose of this giveaway, nor will it be given to UFile, the CRA or anyone else). I will email back the access code that will enable free use for a whole family's returns, a $24.95 value!

Tax Filing and Foreign Income Form T1135 - Save Some Trees and Your Time

Tax filing tip of the day ...
The Canada Revenue Agency is keen to track down potential tax cheats who hide their millions and billions away in foreign tax havens. So they oblige everyone to declare their foreign holdings over $100,000 by filling in form T1135 "Foreign Income Verification Statement" to submit with their tax return. Unfortunately, in the course of testing online tax prep packages I have noticed that the packages are not always clear about a couple of common situations where taxpayers do NOT need to fill in T1135:
1) if those holdings happen to be within a registered account, such as an RRSP, RESP, RRIF, TFSA, LIRA, LRIF, RPP etc; or
2) foreign investments held in Canadian ETFs (e.g. iShares XSP, which holds the S&P 500, but is registered in Canada by iShares Canada and traded on the TSX) or Canadian mutual funds

The instructions and examples on page 2 of the T1135 (available here from the CRA with an FAQ here) make this clear. It makes sense that it would be so as the CRA already is able to collect and control taxes on such accounts.

If you do have over $100k in foreign assets, such as US shares or ETFs in a taxable account, then you must mail in the signed paper copy, even though the rest of the tax info has been NetFile'd online.

Tax Saving Idea for Couples: the Superficial Loss Shuffle

"Superficial loss shuffle" is such an appealing name and the concept itself has the amusingly ironic quality of turning the CRA's superficial loss rules, which normally disallow tax advantages to an investor, on their head and give an advantage instead to the couple with investments in separate taxable accounts, one of which has capital gains and the other losses.

The idea is that the spouse with the losses be able to transfer them to the spouse with the gain and eliminate any tax owing. The idea and the description of how it works is here on the CCH website in Tax Planning in a Downturn in the February 2009 issue of the Financial Planning eMonthly newsletter under the pen of lawyer and accountant David Louis.

Note that the CRA prescribed rate of 3% mentioned in the article is now down to the can-never-go-lower rate (since it must be a positive whole number) of 1%.

QuickTax Online Tax Return Giveaway

Tax preparation season is in full swing with just over a month to go till the April 30th filing deadline. To help us get through with a minimum of fuss and bother and maybe to promote their product, tax software heavyweight QuickTax has provided me with an access code to give away to readers for use of any of its online versions (cannot be used for the download version to install on your own PC). That's a value of up to $39.99.

Enter by leaving a comment on this post by midnight eastern time Friday March 26th. Use a unique name (not as anonymous) so I can do a random draw from the entries. I will post the winner's name for him/her to contact me via email so I can send the code. The winner's email will not be used for any other purpose.

Disclosure: QuickTax has given me another access code for my own use. I am busily using it to test all the NetFile certified online tax prep software out there to find out which is the best as I did last year for the 2008 tax year. Look for the results soon.

Tax Breakdown of 2009 Distributions for iShares ETFs Now Available

It's nearing the time to prepare the 2009 tax return and iShares Canada has released the breakdown for tax purposes of the 2009 distributions of all its funds. Knowing the actual cash distribution received during the course of the year is not enough to do taxes since distributions are not the same as dividends. Some of the distributions are dividends (which themselves can be eligible or ineligible and taxed at different rates) but others are interest, capital gains or foreign income and there is also possibly credit for foreign taxes paid and deductions of Return of Capital to be made against the Adjusted Cost Base of holdings in taxable accounts.

The data is available for each ETF in the Distribution History link in the left hand margin of the individual ETF webpage (e.g. the TSX Composite ETF XIC) as well as a convenient pdf table of all the funds here.

New Data on TFSA vs RRSP and Canada's Rube Goldberg Tax System

Cartoonist Rube Goldberg was famous for his drawings of incredibly complex, convoluted machines. That's Canada's income tax system. A new paper from the CD Howe Institute Saver’s Choice: Comparing the Marginal Effective Tax Burdens on RRSPs and TFSAs (kudos to Don Cayo of the Vancouver Sun on whose blog I found the link) reveals the gory detail of the complexity created by the interaction of all the start and stop levels of tax credits, tax brackets, tax surcharges, rebates and clawbacks. The table they show for an Ontario taxpayer has no less than 33 income levels at which tax rates either go up or down. Contrary to popular belief, the tax you pay on your next dollar of income, the marginal rate, does NOT go up constantly and smoothly. It bounces up and down by more than 100% for very small rises in income. These tax items are not special rules for individuals in unique circumstances, it is what everyone faces.

What's more, and what is important for the average person trying to decide whether to put savings into a TFSA or an RRSP, as a result the better choice flip-flops back and forth between TFSA and RRSP. The answer varies by: Province, by income in retirement compared to during working life (the replacement rate) and by working life income level.

CD Howe's Findings

• $20-30,000 or so working income, TFSA always is better and by a massive amount, the GIS clawback being the primary cause as TFSA withdrawals are not included as income for the calculation while RRSP withdrawals are included.
  
• $35-45,000 or so working income, RRSP is better but not by nearly as much as the TFSA advantage in the bullet above
• the boundary between TFSA and RRSP shifts higher as retirement income replacement is lower e.g. in Ontario, at 80% retirement replacement, the TFSA is better up to around $30,000 working income but at 60% replacement, the TFSA is better up to about $39,000
  
• TFSA is better across most of the working life income spectrum for Alberta and Quebec and most income replacement levels
• most surprising, TFSA is everywhere best for the highest income earners of $110,000+ even when their income replacement is only 60% - one would have thought they would end up in a much lower tax bracket and thus conform to the general principle that RRSP is best when your tax rate is less in retirement.
  
• above low income levels, the advantage for TFSA or RRSP is not enormous (less than 10%+/- in marginal tax rate), except for huge spikes up or down in Ontario
  
• a change of only a few thousand dollars in working income can shift the balance, sometimes drastically, from TFSA to RRSP or vice versa, especially in the band $35,000 up to about $80,000 in Ontario (which leads me to conclude that Ontario residents face the most uncertain, difficult and chaotic tax system as far as TFSA vs RRSP planning goes)

Ontario residents in the income range from $35,000 to about $90,000 probably need most to hedge their bets about where their retirement tax rate will end up and to contribute to both their TFSA and RRSP. At least both benefit from the powerful advantage of tax-protected compounded growth while funds are in the plan.

Unfortunately, CD Howe only looked at the numbers for Ontario, Alberta and Quebec, so taxpayers in other Provinces must be wondering where they stand. Don Cayo got preliminary data from CD Howe about BC, which he says is similar to Ontario.

The Federal government could do us a favour by expanding TFSA contribution room to make it equal to the RRSP, or make it a combined total that people can divide between the two as they choose.

ETF Combinations for Tax Loss Selling while Maintaining Asset Classes

This is the time of year when most people think of doing tax loss selling in taxable accounts. Larry Macdonald in Using ETFs for Tax Harvesting: Hidden Alpha? on Seeking Alpha has reminded us that ETFs are a handy vehicle for doing that and last year I posted my suggestions for doing it properly. (In case you are wondering why tax loss selling is worthwhile, something that is rarely demonstrated, check out Tax Loss Selling Explained: What, Why and How on HowToInvestOnline).

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
  

US Equity - since the large caps represent about 3/4 of the US market, one might consider swapping total market for large cap or vice versa, especially if it just for the short term
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
  

US Bond Total Market

• AGG - Lehman US Aggregate Bond
• BND - Lehman US Aggregate Bond
• GBF - Lehman Brothers U.S. Government/Credit (holds both govt & corp bonds)

Emerging Market Equity
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

2) Traded in Canada on TSX

• 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

US Real Estate

• VNQ - MSCI US REIT
• RWR - DJ Wilshire REIT
• ICF - Cohen and Steers Realty Majors
• IYR - DJ US Real Estate

Global Equity
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

... Developed Country (i.e. ex Emerging Markets)

• EFA - MSCI EAFE
  
• ADRD - BONY Developed Markets 100 ADR (large cap)
• IOO - S&P Global 100 (large cap)
  
• EEN - Robeco Developed International Equity
  

2) Traded in Canada

• 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

For other (sub)asset classes not covered above, like commodities, small cap and value ETFs, a good place to look for ETFs and the index of each is Stock-Encyclopedia.com. It groups ETFs by categories which roughly correspond to asset classes and the index is shown in the summary for each ETF - e.g. see IOO.

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.