Buying back ETFs

How to capture a rebound without running afoul of the superficial-loss rules.

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From the December/January 2014 issue of the magazine.

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Photograph by Ben Nelms

Photograph by Ben Nelms

Q: I sell my ETFs if they fall below a certain threshold, then buy them back if they go up again. I know the Canada Revenue Agency says you need to wait 30 days before buying back stocks, but does this apply to ETFs as well?

-Ron Elliott, Surrey, B.C.

A: No one likes to be called superficial. In fact, the CRA has gone so far as to create rules about it, at least as it applies to your money. The “superficial loss” rules “essentially prevent the realization of a loss on the disposition of capital property if you reacquire ‘identical property’ within 30 days after the disposition,” according to Cary Heller, a Tax Partner at Collins Barrow Toronto LLP. As you feared, the rules apply to ETFs as well as stocks. For example, if you sell an ETF at a loss and then reacquire the same ETF within the 30-day window, the loss will be denied. (It will also be deemed a superficial loss if your spouse holds the same security.) To step outside these rules, Heller says, “you need to ensure that the second ETF you are purchasing in the 30-day window tracks a different index.” This is fairly easy to do in practice, since there are so many ETF choices available. A Canadian equity ETF may perform similarly to another that tracks a slightly different index, allowing you to capture any rebound without running afoul of the superficial-loss rules.

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