Posted by Alfred Lee on December 9, 2014

Winter’s here! For many Canadians, December’s chilly temperatures signal the onset of holiday shopping, festive eating and resolutions. But for savvy investors, ’tis the season to start looking ahead to year-end tax-saving strategies that will keep more money in their pockets now and down the road.

One particularly effective method is tax-loss harvesting. Say, for instance, that you’re a big fan of the energy sector so you’ve invested in Husky Energy Inc. (Ticker: HSE). It’s currently down about 20% year-to-date. If you hold on to the stock, you can’t realize any capital losses to offset any capital gains so you could potentially end up paying more come tax time.

Tax-loss harvesting, though, gives you a more favourable outcome. Here’s how it works:

• Sell the stock and crystallize the loss to offset capital gains in the portfolio of the current tax year.
• Use the proceeds to buy back into the Canadian energy sector through an Exchange-Traded Fund (ETF), such as the BMO S&P/TSX Equal Weight Oil & Gas Index ETF (Ticker: ZEO), to maintain a similar exposure in the sector.
• It should be noted that the same security cannot be bought back for the next 31-days for tax loss harvesting. There may also be restricted securities, so investors should check with their tax advisors.

In short, tax-loss harvesting gives you a place to park your money and maintain a similar exposure to your disposed security. You can still participate in the movement of the marketplace through a low-cost ETF, which offers market or sector exposure but minimizes company-specific risk. The strategy applies not only to stocks but also to other financial instruments including bonds, mutual funds, preferred shares and ETFs.

In addition, if there are no gains in the current tax year, the losses can be retroactively applied to the prior three years or carried forward.

As 2014 winds down, keep the following dates in mind. The last day for Canadian tax -loss selling is December 24 th and the last day for U.S. tax-loss selling is December 26 th. So don ’ t delay!

It is vitally important to not only think about how your investments will meet your financial goals but also how they will affect your taxes. Tax-loss harvesting is just one of many tax-saving strategies that help Canadians design financial portfolios with fewer tax implications, so be sure to consult a tax advisor for advice and compliance issues.

Now that we’ve got you warmed up for tax season, get outside and bask in winter. Like taxes, it’s an inevitable part of being Canadian − so enjoy it while it’s here!

For more information on tax loss harvesting or to speak with a BMO representative, please contact us .

This communication is intended for informational purposes only and is not, and should not be construed as, investment and/or tax advice to any individual. Particular investments and/or trading strategies should be evaluated relative to each individual’s circumstances. Individuals should seek the advice of a professional, as appropriate, regarding any particular investment.

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