A tax-saving strategy using ETFs

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Canadian equity markets, exchange traded funds, mutual funds and individual Canadian stocks have had less than a stellar year in 2011 to date. On average, most Canadian securities are trading at lower levels than recorded on Dec. 31, 2010. The TSX composite index is down 10.2 per cent. Opportunities to reduce capital gains tax are available by switching out of Canadian-listed securities with a capital loss prior to the close on Dec. 23. Realized losses can be applied against realized capital gains, can be carried back three years, or can be carried forward indefinitely.

Investors can avoid the 30-day rule set by the tax man when realizing capital losses. Investors are required to wait 30 days before buying back a security in order to preserve the loss for tax purposes. Instead of waiting for 30 days to repurchase a favoured security, investors simply can switch into securities that have comparable investment characteristics.

Opportunities to switch from existing Canadian-listed ETFs trading at a loss into similar ETFs are listed below. Leveraged ETFs were not included in the survey. ETFs with a loss of 10.0 per cent or more since the beginning of the year were identified:

iShares S&P/TSX Energy

Percent Loss Since Dec. 31: 14.4

Replacement: BMO Equal Oil and Gas

iShares MSCI EAFE

Percent Loss Since Dec. 31: 12.6

Replacement: Claymore International

iShares China Index Fund

Percent Loss Since Dec. 31: 12.1

Replacement: Claymore China Index

iShares MSCI Brazil

Percent Loss Since Dec. 31: 19.5

Replacement: Claymore BRIC

Claymore Oil Sands

Percent Loss Since Dec. 31: 20.3

Replacement: iShares S&P/TSX Energy

Claymore BRIC

Percent Loss Since Dec. 31: 19.0

Replacement: iShares MSCI Brazil

Claymore Mining

Percent Loss Since Dec. 31: 18.6

Replacement: BMO Equal Base Metals ZMT

Claymore International

Percent Loss Since Dec. 31: 12.0

Replacement: iShares MSCI EAFE

Claymore Banks and Lifeco

Percent Loss Since Dec. 31: 14.2

Replacement: BMO Equal Wt. Banks

Claymore China Index

Percent Loss Since Dec. 31: 11.9

Replacement: BMO China Index

BMO International

Percent Loss Since Dec. 31: 12.4

Replacement: Claymore International

BMO Emerging Markets

Percent Loss Since Dec. 31: 13.8

Replacement: iShares Emerging Markets

BMO China Index

Percent Loss Since Dec. 31: 19.6

Replacement:

iShares S&P/TSX China

BMO Equal Base Metals 29.4

Percent Loss Since Dec. 31: 29.4

Replacement: iShares Global Base Metals

Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. He is also a research analyst for JovInvestment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by JovInvestment. JovInvestment is the investment manager for the Horizons family of ETFs. Daily reports are available at http://www.timingthemarket.ca/