Q&A: Sell income trusts for capital loss?
Question: I’m thinking of doing some tax loss selling to offset capital gains I had made in previous years. My broker is also encouraging me to sell some of my income trusts, as they have dropped in value and in many cases have reduced their distributions. While I think I understand how to decide whether a stock is a candidate for tax loss selling, I am not sure about income trusts. For example, the ACB may be reduced by an amount that won’t be known until early next year. What are your thoughts? – L.J., North Vancouver, BC
Gordon Pape’s Answer: You raise a very good question. A portion of the distributions from some trusts may be treated as “return of capital” and thus received on a tax-deferred basis. Such amounts are subtracted from the original purchase price to arrive at an adjusted cost base (ACB) for purposes of calculating a taxable capital gain or loss.
The actual amount of such tax-deferred income isn’t usually announced until after year-end. That makes advance tax planning more difficult, but not impossible. You can usually get some idea of the approximate percentage of tax-deferred income to expect by reviewing the pa history of the trust. It won’t be the same from year to year, but you can make an informed guesstimate. Reading the management quarterly financial commentaries may also help.
There is another angle to consider here. Some income trusts contain guarantees of full repayment of principal at maturity. You should look carefully at the projected yield to maturity in these cases. At current NAV levels, these yields are very attractive in some cases, even at reduced levels of distribution. – G.P.
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