Canada’s two dominant telecom stocks have been in rough shape, and that’s putting it mildly. Year to date, BCE Inc. (TSX:BCE) is down about 4.6% on a price basis, while TELUS Corporation (TSX:T) has fallen roughly 11%. Stretch that out to three- and five-year periods, and the picture gets even uglier.
We’ve already seen the stress show up in dividends. BCE cut its payout earlier this year after debt levels became difficult to manage and free cash flow no longer comfortably covered distributions. TELUS has now paused dividend growth, which, if you remember how this played out with BCE, is often an early warning sign.
The good news is that investors sitting on unrealized losses in either stock aren’t completely stuck. In a non-registered account, those losses can be turned into something useful through a strategy called tax-loss harvesting.
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What Is Tax-Loss Harvesting?
Tax-loss harvesting is the strategy of selling an investment in a non-registered account for less than what you paid for it. Doing so realizes a capital loss, which the Canada Revenue Agency (CRA) allows you to use to offset capital gains.
Those losses can be applied against capital gains you realize in the current tax year. If you don’t have gains this year, you can carry the loss back up to three years to recover taxes previously paid, or carry it forward indefinitely to use in the future. Having capital losses on hand gives you flexibility when managing taxes around portfolio rebalancing or profit-taking.
There is an important catch, though: the superficial loss rule. If you sell a stock like BCE at a loss, you cannot repurchase the same security within 30 days before or after the sale. If you do, the loss is denied and added back to your adjusted cost base, wiping out the tax benefit. In the U.S., this is known as the wash sale rule.
You also need to avoid buying something the CRA could consider “substantially identical.” For example, selling BCE and immediately buying a single-stock ETF that holds BCE with leverage or covered calls would likely violate the rule.
Swapping BCE for TELUS could work, but doesn’t really help either, since you’re just moving between two highly indebted companies in the same structurally challenged sector. That raises the obvious question: what’s a better alternative?
The Best Tax-Loss Harvesting Partner for Telecoms
One option to consider is the Hamilton Enhanced Utilities ETF (TSX:HUTS). This ETF holds a diversified basket of high-yield Canadian utilities, telecoms, and pipeline companies. Yes, it still includes exposure to BCE and TELUS, but it also spreads risk across a broader set of regulated and infrastructure-style businesses.
HUTS also uses modest leverage. For every $100 of investor capital, the fund borrows an additional $25, similar to using margin, but packaged inside an exchange-traded fund that’s eligible for non-registered accounts. Because many of the underlying holdings pay eligible Canadian dividends, the distributions can be relatively tax-efficient compared to foreign income.
The leverage increases risk, but it also boosts income. That’s how HUTS is able to pay a distribution yield of about 6.2%, with monthly payouts. As a tax-loss harvesting replacement, it allows you to maintain income, diversify away from pure telecom exposure, and avoid running afoul of the superficial loss rule.
