Get Strategic with Tax-loss Harvesting

I can’t believe it’s nearly the end of 2018! I’m looking forward to catching up with friends and spending time with family, but before all this happens, the end of the year is a good time to have a discussion on the upcoming tax-loss harvesting season. As you may know tax-loss harvesting is a strategy designed to help you lower your tax burden. It involves selling your poorly performing investments at a loss and then using those losses to offset realized taxable gains on other investments.

An overview of tax-loss harvesting

Here are a few important points to remember:

• You must first apply the loss against the capital gains in the current year
• You can carry-forward any remaining losses up to three years to offset future capital gains
• These investments cannot be held within a tax-sheltered account (i.e. your TFSA or RRSP)
• You can’t sell and re-buy the same security within a 30-day period

Of course I am not a tax specialist. The process of tax-loss harvesting can be complicated, so before engaging in this strategy I recommend speaking with your in-house tax specialist to ensure you are doing it right and within the Canada Revenue Agency’s guidelines.

Seizing the opportunity

Given that tax-loss harvesting involves selling and buying securities, ETFs, or Mutual Funds, I think it’s the perfect time to take a fresh look at your portfolio. Take advantage of this opportunity to free-up cash that you can then deploy into securities that may provide similar or different outcomes, if you are looking to change your investment outlook. By taking a strategic view you can re-consider your investment strategy and long-term goals.

In a year that has witnessed increased market volatility and turbulence, you can probably identify a few funds in your portfolio that may not have performed as well as you hoped. These portfolio laggers may inspire you to explore a few key markets that you may want to consider taking a different position in.

Getting strategic in Emerging Markets

Despite starting the year off strong, emerging markets (EM) has had a difficult year due to fears about new tariffs, trade wars and slowing growth. If you want to be a little more strategic in your emerging markets equity selection, this is your opportunity to make the switch for tax-loss harvesting purposes and transition to a different EM fund (like our Franklin LibertyQT Emerging Markets Index ETF (FLEM) that uses a smart beta approach to tilt towards historically-rewarded factors whose goal is to provide a smoother performance ride, a lower beta, and a higher dividend yield. Our bias is toward Quality and Value.

Managing risk within your Canadian exposure

Likewise, our home and native land also has had a pretty difficult year. Canada has continued to suffer from depressed commodity prices, all-time lows in Canadian oil prices and the fear that comes with normalizing interest rates. Our Canadian Equity ETF (FLRM) is actively managed and designed for clients who want to participate in the upside potential of the Canadian equity market, but cannot stomach the volatility. The fund actively uses put options as a hedging strategy to reduce the impact of a steep Canadian market decline.

Going active with Global Fixed Income

If you’re taking a holistic look at your portfolio, then you should also consider your fixed income allocation. Global bond markets have been a popular topic lately as some pundits have claimed that there is growing risk with both government and corporate debt from a global standpoint. If you are concerned about this you may want to consider transitioning to a fixed income fund like FLGA that actively manages duration, maturity and yield. This ETF will provide access to global government, sovereign, and corporate bonds on an active currency hedged basis.