Finding the perfect pair of ETFs for tax loss selling

If you’re using ETFs in a non-registered account, there’s plenty of opportunity to harvest capital losses and reduce your tax bill. Justin Bender and I tell you exactly how to do this in our new white paper, Tax Loss Selling: Using Canadian-listed ETFs to defer taxes on capital gains. As I explained in my previous post, tax loss selling involves dumping an ETF that has declined in value to crystallize the loss, and then buying a similar (but not identical) ETF to maintain the exposure in your portfolio. The Canada Revenue Agency considers any two index funds tracking the same benchmark to be identical property. So you cannot, for example, claim a loss after selling the iShares S&P 500 (XUS) and replacing it with the Vanguard S&P 500 (VFV): if you do, it will be denied as a superficial loss. Fortunately this year has seen a number of new ETF launches, including international equity ETFs from iShares and Canadian and US equity ETFs from Vanguard. These give Canadians much better options when tax loss selling, because it’s now relatively easy to find pairs of ETFs tracking similar indexes from different providers. That allows you to keep your market exposure essentially unchanged while staying on the right side of the tax laws. When we put together the white paper, Justin analyzed 10 years’ worth of index data to find the pairs that most closely mirrored each other. For example, he compared the S&P/TSX Capped Composite Index to the FTSE Canada All Cap Index. Turns out the two indexes dance to the same drummer:

We can therefore be reasonably confident that the BMO S&P/TSX Capped Composite (ZCN) and the recently launched Vanguard FTSE Canada All Cap (VCN) make a suitable pair for tax loss selling. Swapping one for the other should allow you to harvest a loss without any meaningful difference in performance. Here’s a list of suitable Canadian ETF pairs to consider when tax loss selling:

Original ETF	Replacement ETF
BMO S&P/TSX Capped Composite (ZCN)	Vanguard FTSE Canada ALL Cap (VCN)
Vanguard US Total Market (VUN)	BMO S&P 500 (ZSP) or any other S&P 500 ETF
iShares MSCI EAFE IMI (XEF)	Vanguard FTSE Developed ex N America (VDU)
iShares MSCI Emerging Markets IMI (XEC)	Vanguard FTSE Emerging Markets (VEE)
Vanguard FTSE Cdn Capped REIT (VRE)	iShares S&P/TSX Capped REIT (XRE)

And if you’re looking for tax loss harvesting opportunities with the US-listed ETFs in the Complete Couch Potato:

Original ETF	Replacement ETF
Vanguard Total Stock Market (VTI)	iShares Russell 3000 Index Fund (IWV)
Vanguard Total International Stock (VXUS)	Vanguard FTSE All-World ex-US ETF (VEU)

Perfect Portfolio e-book now available

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Anton says:

May 19, 2022 at 4:33 pm

Thanks for this. I have exposure to ZRE – which REIT can replace this for tax loss harvesting?

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Finding the perfect pair for tax loss selling

Perfect Portfolio e-book now available

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