What is Tax-Loss Harvesting?

Overview 

Tax-Loss Harvesting (TLH) is the strategy of selling securities that have fallen below their purchase price to generate realized capital losses so they can be used to lower taxes on investment profits by offsetting realized capital gains.

How it Works

Unlike traditional wealth managers who typically only look at client accounts for TLH opportunities once per year, OneVest uses algorithms to scan your accounts on a daily basis for TLH opportunities. This allows Portfolio Managers to sell positions at a capital loss much more frequently and, in turn, grants you more opportunities in each calendar year to harvest these “tax-loss credits”.

TLH is implemented by the OneVest Portfolio Management team by automatically selling your securities with market values that have dropped more than 5% below their cost base (i.e., when the current trading price is 5% or less than the average price paid to acquire the security). This effectively crystallizes the losses and creates tax-loss credits which then can be applied to offset past, current, or future capital gains taxes. 

Once the security is sold, the OneVest Portfolio Management team replaces it with a substitute security that is very similar but not considered “identical property” to keep the risk/return and asset allocation characteristics of the portfolio generally identical. In the case of ETFs, identical property means the ETFs cannot track the same underlying index.

Note: not all OneVest portfolios have available substitutes. You can view the full list of substitute securities here.

Tax-Loss Harvesting Example

Below is a hypothetical example that illustrates how TLH might work inside a OneVest portfolio:

Based on a total investment of $100,000 in OneVest’s medium risk core portfolio, a client has about $11,000 (this is their ‘book value’) invested in the XUU (iShares Core S&P US Total Market Index) ETF in their non-registered (taxable) cash account. Since their initial investment, the value of their position has since dropped over 5% to $10,400. Because the funds are in a non-registered account, a trade to sell the investment is triggered and the proceeds are reinvested into XUU’s substitute ETF, VUN (Vanguard US Total Market Index ETF). The funds track a different index but have similar investment exposure keeping the composure of the portfolio nearly identical so they can expect to see similar returns over the long term.

OneVest’s strategy to sell the position that dropped over 5% and realizing the capital loss on the first ETF (XUU) results in the loss having been crystalized - meaning the client is now able to harvest the $600 in realized capital losses and apply them against future realized capital gains that occur in their portfolio. 

Eligibility

OneVest’s Portfolio Management team implements this automated TLH service on taxable, non-registered client accounts (i.e. Cash/Personal Accounts).

Client accounts with over $10,000 in assets are eligible for OneVest’s automated TLH service. 

As of December 2022, TLH is only available on OneVest Core Portfolios.

How to Use Capital Losses When Filing Your Taxes 

Allowable capital losses have to be applied against taxable capital gains in the year the losses were generated. However, if you have capital losses that exceed capital gains, the amount becomes part of the calculation of your net capital loss for the year. 

Although net capital losses cannot be applied against other sources of income, the CRA allows them to be applied against realized capital gains in any of the 3 preceding years or in any future year. This means that unused realized capital losses can be carried forward indefinitely. If this is the case you must complete Schedule 3 and attach it to your tax return. This will ensure that these net capital loss is updated on CRA's records. To carry back capital losses to prior years you will be required to file form T1A - Request For Loss Carryback.

The Superficial Loss Rule

The Superficial Loss Rule stipulates that in order to apply realized capital losses against realized capital gains, clients cannot buy the same or identical property during the period starting 30 calendar days before the purchase of the securities, and ending 30 calendar days after the sale. 

Identical property, in the case of ETFs, means that they track the same index. The Superficial Loss Rule is avoided when an ETF that tracks a different index is used as a replacement. You can view OneVest’s list of substitute securities here. 

The superficial loss rule applies to all of an individual’s non-registered (taxable) investment account across all financial institutions, as well as affiliated persons (spouse, common law partner, corporation etc.). This means that if an investor or an affiliated person purchases a security that OneVest has sold in a non-registered account at a different financial institution within the 30 day period outlined above, it would trigger the superficial loss rule and deem the capital loss ineligible. This is one reason why clients will need to opt into OneVest’s TLH service as it may not be beneficial for all clients. If you hold any of the securities used in OneVest portfolios in a non-registered account elsewhere you may want to consider opting out of TLH.

It should also be noted that capital losses generated in OneVest portfolios are not isolated to be applied against gains generated in OneVest portfolios, and can be used to offset capital gains that have been generated in non-registered investment accounts elsewhere.  

How to Enable and Disable TLH

The automated TLH service can be turned on and off within your cash account.

To enable TLH, you need to:

1. From the home screen click on your Cash Account 
2. From the account details screen click “Enable Tax-Loss Harvesting” 

To disable TLH, you need to:

1. From the home screen click on your Cash Account 
2. Click on the green box that shows your Tax-Loss Harvesting statistics
3. In the pop-up box click the toggle to switch Tax-Loss Harvesting off 

Is Tax-Loss Harvesting Right for Me? 

Tax-Loss Harvesting might be right for you if you do not:

1. Have investment accounts elsewhere
2. Expect your income to rise substantially in the next few years

If you have non-registered investment accounts elsewhere that hold any of the securities in OneVest’s portfolios eligible for Tax Loss Harvesting, there is a risk that these securities may be traded at inopportune times and trigger the superficial loss rule. If you have self-directed non-registered accounts elsewhere you are able to better control when securities are traded and potentially avoid triggering superficial losses. If you have non-registered investment accounts elsewhere that are managed by a portfolio manager, this is much more difficult to control and avoid. 

Additionally, if you expect your income to rise substantially in the next few years it may make sense to pay taxes now while you are in a lower tax bracket than deferring taxes to when you are in a higher tax bracket in the near future.

Need More Information?

If you need more information to determine if OneVest’s automated TLH service is right for you, you can schedule a time to speak with a OneVest Portfolio manager. To submit a request, please reach out to the OneVest support team.

Frequently Asked Questions

Below is some additional information on commonly asked question:

1. Where is the automated TLH activity listed?
   TLH activity is found in your profile under “Trades”. OneVest provides a snapshot of TLH activity in your monthly statements as well.
   
   
2. Why doesn’t TLH apply for registered accounts (e.g., TFSA, RRSP)?
   The TLH service doesn’t apply for registered accounts (e.g. TFSA, RRSP) because investment profits in registered accounts are not taxable.

Disclaimer

The information contained in this article is for information purposes only. This information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. The information given here is intended to be general in nature and is not personal financial product advice. It does not consider your objectives, financial situation or needs. Before acting on any information, you should consider the appropriateness of the information provided and the nature of the relevant financial product having regard to your objectives, financial situation, and needs. In particular, you should seek independent financial advice and our investor disclosure statement prior to making an investment decision in relation to a financial product. 

You are solely responsible for determining whether to use OneVest’s Tax Loss Harvesting (TLH) feature and whether you would benefit from doing so. You retain that responsibility notwithstanding any general guidance that OneVest may provide. The benefits of TLH in reducing an investor’s tax liability will depend on the investor’s entire tax and investment circumstances, including but not limited to: their income, location of residence, the purchases and dispositions of assets in the investor’s (and affiliated persons) accounts held outside of OneVest, type of investment accounts held, and applicable investment holding periods. 

OneVest’s automated TLH feature may not be suitable for all investors. Investors whose circumstances typically make TLH unsuitable for them include, but are not limited to: those who trade (or affiliate persons trade) any of the securities in the OneVest portfolios (or substantially identical securities) in external accounts, including joint accounts. OneVest is not able to control superficial losses associated with accounts that are held outside OneVest. Clients who enable our automated Tax Loss Harvesting feature are responsible for monitoring their external accounts to avoid any superficial loss sales. Clients who do not have any taxable accounts will not benefit from the operation of Tax Loss Harvesting.

When OneVest’s Portfolio Management team replaces investments with “similar” investments , it does so by purchasing investments that are expected, but are not guaranteed, to have similar performance and risk exposure. Expected returns and risk characteristics are no guarantee of actual performance. The performance of the new investments purchased by OneVest may be better or worse than the investments that were replaced. Clients may also incur higher product-level fees in the replacement investments.

OneVest does not represent in any manner that TLH will result in any particular tax consequence or that specific benefits will be obtained for any individual investor. The TLH service is not intended as tax advice. Please consult your tax advisor as to whether TLH is a suitable strategy for you, given your particular circumstances. The tax consequences of tax loss harvesting are complex and uncertain and may be challenged by the CRA or any other tax authority. You and your tax advisor are responsible for how transactions conducted in your account are reported to the CRA, or any other tax authority, on your personal tax return. OneVest assumes no responsibility for the tax consequences to any client of any transaction associated with its Tax Loss Harvesting Feature.

OneVest takes reasonable steps to provide up-to-date, accurate and reliable information, and believes the information to be so when provided. Information obtained from third parties is believed to be reliable but OneVest and its affiliates assume no responsibility for any errors or omissions or for any loss or damage suffered. OneVest reserves the right at any time and without notice to change, amend or cease publication of the information. Additionally, your capital is at risk with any type of investment. The value of your portfolio with OneVest can increase or decrease and you may get back less than or more than you invest. Past performance is no guarantee of future results.