5i Stock Screener: Canadian Stocks for Tax-loss Selling [2021]

As we approach the end of the year, many investors begin to take advantage of a common practice in investing; tax-loss selling. This is a chance for investors to 'benefit' from stocks that resulted in a capital loss. This is done by selling a losing position in a non-registered account and in turn reducing the overall capital gains tax one owes on their investments. In addition to this, unused capital losses can be used from up to three years in the past or carried forward indefinitely.   

Small-cap stocks, in particular, are usually the most affected by tax-loss selling due to a combination of two factors: 

1)    They have a larger retail ownership base who invest using their non-registered accounts. 

2)    Smaller companies tend to be less liquid and can be more impacted by broad-based selling.

Large-cap stocks are not as affected by tax-loss selling since they are generally seen as ‘more stable’ than small-caps, resulting in less sensitivity to price movements.

We find this to be a relevant point to mention given the nature of some of the sell-offs we have seen this year. With many retail investors having taken on more risks in 2020 in high-growth small-cap names, many of those names have seen sharp corrections since leaving many investors ‘holding the bag’. However, there are likely still legitimate growth prospects for some of these companies. As we approach the end of the year, it may be worth considering realizing a loss to cut one’s tax bill and start fresh with a few high conviction names at a low price.

Following the sale of these ‘losing’ stocks, many long-term investors may choose to re-invest in those same stocks (after 30 days) if they continue to show good fundamentals and have strong prospects for the future. After all, even the best of companies can have a bad year. Writing off good companies based on one year of bad performance has proven to be a source of regret for many investors. 

The Stock Screen

This month’s stock screener identifies companies whose share price has depreciated in price throughout the year by at least 15% while expecting revenue growth of at least 15% next year. These are companies that might be more sensitive to tax-loss selling as year-end approaches but due to the growth and fundamentals, might show an opportunity if they do see weakness due to tax-loss selling.

Stocks on this list not in one’s portfolio can also serve as a general watchlist over the next 30-60 days for names that may continue to be (unduly) sold off due to other investors engaging in tax-loss selling. While we think some names on this list have the potential for recovery, keep in mind this is not an endorsement for the names listed below.

For reference, we have also linked tax-loss selling screener articles from the last two years here (2020) and here (2019).