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The Silver Lining in Your Investment Losses

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It’s been a year mostly to forget for equity investors. While markets have rallied somewhat during the past month, they have been solidly in the red for much of 2022. This means a lot of stocks have been sold, but in addition, many portfolios are showing big losses on paper as investors continue to hold depressed issues in the hope prices will recover in the near term.

While patience is normally the watchword during bear markets – history shows the market always eventually recovers – there can be an exception to that rule. Investors should take the opportunity, in light of market events, to undertake a tax-efficiency review of their portfolio to determine whether any realized capital gains can be offset by either monetizing any unrealized losses in the current year or utilizing loss carry forward or the carry-back mechanism.

The concept is fairly simple: you are allowed to deduct the amount of losses resulting from the sale or donation of a stock or other capital property from the amount of any gains realized from the sale of another capital investment. While equity gains have been hard to come by this year, you also can use a loss realized this year to offset any realized gains during any of the three preceding taxation years (i.e., 2019, 2020, or 2021).

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“Doing so can allow you to recoup some of the tax you paid on those gains’” says Joseph Micallef, National Tax Leader, Financial Services with KPMG in Canada. You also can retain the loss to reduce capital gains realized in any future taxation year.”

Identify Assets to Sell

If you have capital gains available to offset with a capital loss, and you currently are holding a money-losing stock that represents market exposure you no longer wish to have, the simplest solution is to sell it and replace it with something else more appropriate to your strategy and risk tolerance. You’d probably consider doing these regardless of market conditions.

But if selling a depressed holding would be contrary to your asset-allocation strategy or disrupt a long-term investment plan, then you can sell it and replace it with another position that provides similar market exposure that is in line with your overall investment. This is known as tax-loss harvesting.

However, investors cannot sell a security and thereby realize a loss, and then immediately buy it back to restore that identical position. “It’s important to be aware of the superficial loss provisions of the Income Tax Act, whereby capital losses realized can be deferred to the extent an identical position is required 30 days before or after the disposition giving rise to the capital loss,” Micallef says.

“When you add the amount of the superficial loss to the adjusted cost base of the substituted property, the amount of your capital gain will be decreased — or the capital loss increased — when you eventually sell the substituted property,” he says. “Corporate taxpayers also need to be mindful of the stop-loss rules, which similarly guard against a transaction being sold only to tax advantage, without any intention of actually disposing of it.”

How to do Tax Loss Harvesting

The following is a rundown on how capital losses can be used to reduce capital-gains tax, and how investors can monetize tax losses.

If you realize capital losses during 2022, you must first apply this amount against any capital gains realized during 2022 to produce a lower net-capital-gain total, of which one-half is taxable. If your losses exceed your gains for that year, you can use the remaining portion to reduce gains realized during any of the past three years. Any unused capital losses can be carried forward indefinitely. The amount of your allowable capital losses remaining from previous years is stated on your 2021 Notice of Assessment.

Consider the following example. Last February you purchased 100 shares of a financial-services company XYZ Inc. for $50 a share, or $5,000 total. Those shares are now trading at $30. You could sell them for $3,000 and realize a capital loss of $2,000, which you could use to reduce the total amount of capital gains you might be reporting for this year. Or you could apply it against any gains realized during the previous three years. To remain invested in financials, you could buy shares of a similar institution or units of a mutual fund that invests across this sector.

“For instance, if you reported $7,000 in capital gains in 2020, you could use your remaining unused capital losses realized in 2022 against taxable gain realized in either 2021, 2020, or 2019,” Micallef says.

To apply a capital loss against a previous year’s income, acquire CRA Form T1A, Request for Loss Carryback and complete “Part 5, Net Capital Loss for Carryback.” (For Quebec tax purposes, use Revenu Québec Form TP-1012.A-V.)

Carry-forward of Previous Losses

If you have losses realized in any previous year those may be used in any subsequent year to reduce any 2022 net capital gains realized. You claim this amount on the appropriate line on your tax return (no special form required). You must take note of the capital-gains inclusion rate that was in force for the year in which the loss was reported.

“When using allowable capital losses from a past year to reduce your 2022 capital gains, you will have to base those amounts on the “inclusion rate” that was in effect when the loss was realized,” Micallef says.

Since 2001, the inclusion rate has been one-half (50%). However, the rate was higher between 1988 and 2000, as follows:

  • 1988 and 1989: two-thirds (66.66%)
  • 1990-1999: three-quarters (75%)
  • 2000: a specific rate stated on your 2000 Notice of Assessment
  • Prior to 1988, the 50% inclusion rate also was 50%.

For example, say you sold share for a gain of $5,000 earlier this year, for a taxable gain of $2,500, based on the current 50% inclusion rate. If you have a $1,000 capital loss that has not previously been used to offset gains in other years, this amount can be used to offset this year’s gain. In a case where this loss was incurred in 1999 when the inclusion rate was 75%, you must calculate an adjustment factor, which is the midpoint of the two rates, or 66.66%. Thus, the net capital loss you could carry forward is $666.66.

Don’t Abandon Your Investment Strategy

While minimizing the overall taxes paid is a desirable goal, the old proverb of “don’t let the tail wag the dog” must be stated as tax decisions should not drive your overall investment strategy.

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Zacks Investment Ideas feature highlights: Alphabet, Tesla, Shopify, Amazon and Palo Alto

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For Immediate Release

Chicago, IL – February 2, 2023 – Today, Zacks Investment Ideas feature highlights Alphabet GOOGL, Tesla TSLA, Shopify SHOP, Amazon AMZN and Palo Alto Networks PANW.

Which of These Stocks Has Been the Best Buy, Post-Split?

Stock splits have been a regular occurrence in the market over the last several years, with many companies aiming to boost liquidity within shares and knock down barriers for potential investors.

Of course, it’s important to remember that a split doesn’t directly impact a company’s financial standing or performance.

In 2022, several companies performed splits, including Alphabet, Tesla, Shopify, Amazon and Palo Alto Networks. Below is a chart illustrating the performance of all five stocks over the last year, with the S&P 500 blended in as a benchmark.

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As we can see, PANW shares have been the best performers over the last year, the only to outperform the general market.

However, which has turned in a better performance post-split? Let’s take a closer look.

Tesla

We’re all familiar with Tesla, which has revolutionized the EV (electric vehicle) industry. It’s been one of the best-performing stocks over the last decade, quickly becoming a favorite among investors.

Earlier in June of 2022, the mega-popular EV manufacturer announced that its board approved a three-for-one stock split; shares began trading on a split-adjusted basis on August 25th, 2022.

Since the split, Tesla shares have lost roughly 40% in value, widely underperforming relative to the S&P 500.

Palo Alto Networks

Palo Alto Networks offers network security solutions to enterprises, service providers, and government entities worldwide.

PANW’s three-for-one stock split in mid-September seemingly flew under the radar. The company’s shares started trading on a split-adjusted basis on September 14th, 2022.

Following the split, PANW shares have struggled to gain traction, down roughly 15% compared to the S&P 500’s 3.3% gain.

Shopify

Shopify provides a multi-tenant, cloud-based, multi-channel e-commerce platform for small and medium-sized businesses.

SHOP shares started trading on a split-adjusted basis on June 29th, 2022; the company performed a 10-for-1 split.

Impressively, Shopify shares have soared for a 50% gain since the split, crushing the general market’s performance.

Alphabet

Alphabet has evolved from primarily being a search engine into a company with operations in cloud computing, ad-based video and music streaming, autonomous vehicles, and more.

Last February, the tech titan announced a 20-for-1 split, and investors cheered on the news – GOOGL shares climbed 7% the day following the announcement. Shares started trading on a split-adjusted basis on July 18th, 2022.

Alphabet shares have sailed through challenging waters since the split, down 10% and lagging behind the S&P 500.

Amazon

Amazon has evolved into an e-commerce giant with global operations. The company also enjoys a dominant position within the cloud computing space with its Amazon Web Services (AWS) operations.

AMZN’s 20-for-1 split was a bit of a surprise, as it was the company’s first split since 1999. Shares started trading on a split-adjusted basis on June 6th, 2022.

Following the split, Amazon shares have lost roughly 18% in value, well off the general market’s performance.

Bottom Line

Stock splits are typically exciting announcements that investors can receive, with companies aiming to boost liquidity within shares.

Interestingly enough, only Shopify shares reside in the green post-split of the five listed.

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Zacks Investment Research

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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.

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$13 million investment in Campbellford Memorial Hospital

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The Campbellford Memorial Hospital will be receiving a $13 million investment from the Ontario Government to address infrastructure concerns.

The announcement was made at the hospital by Northumberland—Peterborough South MPP David Piccini.

The $13 million is broken down as follows:

  • $9,639,900 will be going to CMH as one-time capital funding to address the HVAC and generator
  • $1,874,929 for reimbursement of CMH’s COVID-19-related capital expenses
  • $771,797 in COVID-19 incremental operating funding
  • up to $600,000 in one-time funding to support the hospital’s in-year financial and operating pressures
  • $163,600 in pandemic prevention and containment funding
  • $81,132 through the Health Infrastructure Renewal Fund
  • $46,884 in health human resources funding.

Interim President and CEO Eric Hanna welcomed the news, saying much needs to be done about the HVAC and generator.

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At the announcement, Hanna spoke of the issues with the generator.

“I’ve got the wee little generator up at the lake and then I’m thinking well, everything should be going well at the hospital,” Hanna told the audience in attendance.

“You get a call from the person in charge who says, ‘Guess what Eric? Generator didn’t start. Oh, so what does that mean? There’s no power in the hospital.’  That’s happened a couple of times in the past year and the generator is over 30 years old.”

Hanna says the solution was not as easy as replacing the generator.

“You can go buy the generator and that may be about a million dollars. But then when we found out afterwards, we came to hook up the new generator to the electrical distribution system and said it won’t work with that because your electrical distribution system is 1956. You can’t plug this generator into that. So now we’re putting close to $5 million into a whole electrical distribution system so the generator will work. It’s part of that ongoing thing and that’s why these costs continue to go up.”

The HVAC system was also something addressed by Hanna.

“It’s a contract close to $7 million to replace that. This wing, for example. There’s no fresh air in this wing. It hasn’t worked in here for 15 years. So now this is administrative areas and the concern was that in some of the patient carriers, it wasn’t working either.  So – having those discussions with David (Piccini) and saying what we have to do to correct this.”

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Chile’s Enap Set to Slash Debt Burden That Weighed on Investment

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(Bloomberg) — Enap, Chile’s state oil and gas company, plans to use near-record earnings to slash its debt burden, while increasing investment in its refineries and in exploration and production.

The company aims to reduce its debt load to about $3 billion “medium term” from the current $4.3 billion, Chief Executive Officer Julio Friedmann said in an interview. Plans include a bond sale in the first half of this year to refinance some securities.

The improved financial position — with 2022 profit surging to $575 million — comes after Enap’s oil and gas operations in Egypt, Ecuador and Argentina got a boost from high crude prices, while healthy international refining margins benefited plants in Chile. Those trends are expected to extend into this year and next, enabling the company to pre-pay some short-term obligations. About half of the current debt burden matures in the next three years.

“We are going to issue bonds,” the MIT-trained executive said Wednesday from the Aconcagua refinery in central Chile. “We are closely evaluating the local and international markets.”

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At the same time, Friedmann, who took the reins at Enap in November, plans to increase capital expenditure to about $700 million this year from $550 million last year.

The increase comes after underinvestment in the past few years because of Covid restrictions and the heavy debt load. Spending will focus on making treatment processes cleaner and upgrading infrastructure, as well as a more aggressive approach to increasing gas reserves in the far south of the country, he said.

Gas Markets

Enap plans to expand in both liquefied petroleum gas and natural gas markets in Chile, focusing on the wholesale business and eventually selling directly to large-scale consumers such as mines. Organizational changes to enable the expansion will be announced soon. There are no plans to enter the final distribution business, Friedmann said. The company wants to supply more gas to southern cities as a way of replacing dirtier fuels such as wood and diesel.

Enap and its partners are also preparing pipelines and a refinery near Concepcion to start receiving crude from Argentina’s Neuquen basin sometime this year in an arrangement that could supply as much as 30% of its needs.

While there’s plenty of potential do collaborate more with energy-rich Argentina, particularly in the Magallanes area, that would require greater long-term visibility on supplies from the neighboring country, Friedmann said.

He sees a role for Enap in the development of green hydrogen in Chile. It’s in talks with three companies to enable its facilities in Magallanes to be used to receive all the wind turbines, electrolyzers and other equipment that will be needed to make the clean fuel. Enap is also evaluating its own small pilot plants and will consider whether to take up options to enter other green hydrogen projects as an equity partner.

While the company will maintain its focus on meeting rising demand for traditional fuels, it anticipates new regulation that will require lower emissions. It’s also looking closely at clean-fuel options for aviation, Friedmann said.

(Adds clean fuel plans in last paragraph. I previous version corrected spelling of CEO’s surname.)

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