ETFs and Superficial Loss rule - 2 Benchmarks: 1 hedged, 1 not hedged

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volumeMax
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ETFs and Superficial Loss rule - 2 Benchmarks: 1 hedged, 1 not hedged

Post by volumeMax »

I am wondering how the superficial loss rules applies to ETFs that track technically same benchmarks, except one tracks a hedged benchmark.

Example:

BMO Equal Weight US Banks Index ETF
- ZBK
Index: Solactive Equal Weight US Bank

BMO Equal Weight US Banks Hedged to CAD Index ETF - ZUB
Index: Solactive Equal Weight US Bank CAD Hdg

If you sell 100 shares of ZBK on day 1 at a Capital Loss, and decide to purchase ZUB on day 2... would you be subject to a Superficial loss?
Last edited by volumeMax on 05 Feb 2018 14:14, edited 1 time in total.
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Re: ETFs and Superficial Loss rule - 2 Benchmarks: 1 hedged, 1 not hedged

Post by Peculiar_Investor »

Welcome to FWF.

Google turned up Harvesting losses with ETFs | John Gabriel | ETF Investing | Morningstar
John Gabriel wrote:A rule of thumb when switching between ETFs (or other index-tracking vehicles) is to simply make sure that the two products track different benchmarks. For example, if you're sitting on a loss in BMO NASDAQ 100 Equity Hedged CAD ZQQ, it is not advisable to rotate into iShares NASDAQ 100 Index (CAD-Hedged) XQQ or PowerShares QQQ (CAD Hedged) Index QQC, as all three funds track the same index.
Also from ETF tax loss selling in Canada
Dan Bortolotti wrote:This is because in 2001 the CRA issued a bulletin (TI 2001-008038) stating that two index funds tracking the same benchmark are considered identical property.
Both these would seem to indicate that for your scenario a superficial loss would result.
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Re: ETFs and Superficial Loss rule - 2 Benchmarks: 1 hedged, 1 not hedged

Post by Spudd »

But aren't these different benchmarks, because one is CAD Hedged?

Index: Solactive Equal Weight US Bank
Index: Solactive Equal Weight US Bank CAD Hdg

I don't know the answer! But I think it is not 100% clear that they are the same index.
volumeMax
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Re: ETFs and Superficial Loss rule - 2 Benchmarks: 1 hedged, 1 not hedged

Post by volumeMax »

Spudd wrote: 05 Feb 2018 13:42 But aren't these different benchmarks, because one is CAD Hedged?
This is exactly what I'm wondering! Are they, or are they not, considered different benchmarks?
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Re: ETFs and Superficial Loss rule - 2 Benchmarks: 1 hedged, 1 not hedged

Post by Peculiar_Investor »

Further quoting from ETF tax loss selling in Canada
Dan Bortolotti wrote:The information in this post should in no way be considered tax advice for individuals. The rules around tax-loss selling are complicated and subject to interpretation. Always consult a qualified adviser before making any transaction for tax purposes.
I'm not an accountant, so should probably have included this disclaimer in my post above.

That said, I'm willing to further investigate and learn. So I checked the the index provider's site information for Solactive Equal Weight Canada Banks Index and Solactive Equal Weight US Bank Index Canadian Dollar Hedged. Checking the "Master Data" section shows different ISIN information, so maybe they are not the same index after all. But because the rules around tax-loss selling are complicated and subject to interpretation, I'd be careful when the names of the indices and benchmarks are so similar that CRA's interpretation might not necessarily be consistent.

FWIW, I tried to find CRA's bulletin (TI 2001-008038) online but it doesn't seem to have been made available.
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Re: ETFs and Superficial Loss rule - 2 Benchmarks: 1 hedged, 1 not hedged

Post by gsp_ »

IANAA either but those don’t look like they’d be subject to superficial loss rules. You could easily make the argument that you made the switch based on currency value projections rather than on tax grounds. Personally I’d never book a capital loss using such a different product that uses such a different strategy(hedging), preferring to find something similar with another provider, but to each his own. If you’re happy with the new product, I would not worry about the superficial loss rule being invoked here.
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