Keen on harvesting tax losses? Scotiabank names 10 Canadian stocks as 'prime candidates'

Published Tue, Nov 14 20237:31 PM EST

As the end of the year approaches, investors are likely to be reviewing their portfolios and considering which stocks to sell to harvest tax losses. Tax-loss harvesting is a strategy to offset capital gains tax from stocks that have run up in share price with losses from non-performing stocks. To aid investors, Scotiabank identified several stocks on Canada's TSX Composite index that are down significantly this year but are still rated as "Sector Outperform" by its analysts. Stocks like TELUS International , Allied Properties REIT , Park Lawn , Trisura Group , Nuvei , Filo , Cargojet , StorageVault Canada , Nutrien and HudBay Minerals , among others, were highlighted as "prime candidates" for tax-loss selling by the bank's analysts. "These are prime candidates to keep long-term exposure to despite recent weakness," said Scotiabank analysts led by Hugo Ste-Marie in a note to clients on Nov. 13. They suggested using "highly correlated names" to maintain exposure during the 30-day waiting period required under the "superficial loss rule." That rule states investors cannot sell and buy the same security within 30 days of one another to crystalize the loss from a tax perspective. However, investors can minimize missing out on market movements during the 30-day window by buying highly correlated names in the same sector. For example, investors who sell Hudbay Minerals could buy Capstone Copper Corp , Ivanhoe Mines , or Teck Resources during the 30 days, according to Scotiabank. "Hence, investors could potentially harvest their tax loss, keep upside potential with the new replacement given high correlation, and stand ready to redeploy into the original name early in the New Year," the analysts said. The table below lists the top 10 worst-performing stocks this year that investors could sell and use the proceeds to buy the named replacement asset. Scotiabank pointed out that the top 20 stocks in the S & P 500 index are up significantly this year, while the remaining 480 stocks are showing losses on average. The difference between top performers and underperformers for Canadian stocks is much wider, according to the investment bank, making tax-loss harvesting an easier strategy for investors. "In Canada, if the TSX is essentially flat for the year, the damage beneath the surface is more significant than the index performance could lead investors to believe: 74 stocks are off more than 10%, of which a further 37 are down more than 20%," the analysts said. "From a breadth perspective, this is one of the worst years since the Tech bubble, as gains are sometimes extremely high but are concentrated in a very limited number of stocks." The bank also cautioned that with many investors looking to offset capital gains, the stocks identified could see continued downward pressure through the end of December.