Canada’s two dominant telecom shares have been in tough form, and that’s placing it mildly. 12 months so far, BCE Inc. (TSX:BCE) is down about 4.6% on a value foundation, whereas TELUS Company (TSX:T) has fallen roughly 11%. Stretch that out to three- and five-year intervals, and the image will get even uglier.
We’ve already seen the stress present up in dividends. BCE reduce its payout earlier this yr after debt ranges grew to become troublesome to handle and free money stream not comfortably coated distributions. TELUS has now paused dividend progress, which, in the event you bear in mind how this performed out with BCE, is commonly an early warning signal.
The excellent news is that traders sitting on unrealized losses in both inventory aren’t fully caught. In a non-registered account, these losses could be was one thing helpful via a method referred to as tax-loss harvesting.
What Is Tax-Loss Harvesting?
Tax-loss harvesting is the technique of promoting an funding in a non-registered account for lower than what you paid for it. Doing so realizes a capital loss, which the Canada Income Company (CRA) lets you use to offset capital good points.
These losses could be utilized in opposition to capital good points you understand within the present tax yr. Should you don’t have good points this yr, you may carry the loss again as much as three years to get well taxes beforehand paid, or carry it ahead indefinitely to make use of sooner or later. Having capital losses available offers you flexibility when managing taxes round portfolio rebalancing or profit-taking.
There is a crucial catch, although: the superficial loss rule. Should you promote a inventory like BCE at a loss, you can not repurchase the identical safety inside 30 days earlier than or after the sale. Should you do, the loss is denied and added again to your adjusted price base, wiping out the tax profit. Within the U.S., this is called the wash sale rule.
You additionally must keep away from shopping for one thing the CRA may contemplate “considerably equivalent.” For instance, promoting BCE and instantly shopping for a single-stock ETF that holds BCE with leverage or coated calls would doubtless violate the rule.
Swapping BCE for TELUS may work, however doesn’t actually assist both, because you’re simply transferring between two extremely indebted corporations in the identical structurally challenged sector. That raises the apparent query: what’s a greater different?
The Finest Tax-Loss Harvesting Associate for Telecoms
One choice to contemplate is the Hamilton Enhanced Utilities ETF (TSX:HUTS). This ETF holds a diversified basket of high-yield Canadian utilities, telecoms, and pipeline corporations. Sure, it nonetheless consists of publicity to BCE and TELUS, nevertheless it additionally spreads threat throughout a broader set of regulated and infrastructure-style companies.
HUTS additionally makes use of modest leverage. For each $100 of investor capital, the fund borrows a further $25, much like utilizing margin, however packaged inside an exchange-traded fund that’s eligible for non-registered accounts. As a result of lots of the underlying holdings pay eligible Canadian dividends, the distributions could be comparatively tax-efficient in comparison with overseas earnings.
The leverage will increase threat, nevertheless it additionally boosts earnings. That’s how HUTS is ready to pay a distribution yield of about 6.2%, with month-to-month payouts. As a tax-loss harvesting substitute, it lets you keep earnings, diversify away from pure telecom publicity, and keep away from working afoul of the superficial loss rule.
