In my previous blog, accompanied by Justin’s video tutorial, we looked at tax-loss harvesting, and more specifically, how to stay on the right side of the superficial loss rule.

A quick recap: effective tax-loss harvesting with ETFs involves selling a fund to realize a capital loss and immediately replacing it with a similar fund that would not be considered “identical property.” According to the Canada Revenue Agency, two index ETFs are identical property if they track the same benchmark.

So, if you sell the iShares Core S&P/TSX Capped Composite Index ETF (XIC) to harvest a loss and replace it with the BMO S&P/TSX Capped Composite Index ETF (ZCN) your loss would be deemed “superficial,” and you would not be able to use it to reduce capital gains.

Fortunately, the choices available to Canadian investors these days are richer than ever. That makes it relatively easy to find a replacement ETF that gives you exposure to the same asset class via a different index benchmark.

There are some important details to consider here. For example, if you sell an ETF that tracks the total U.S. market, you could replace it with another that tracks the S&P 500. But this is not an ideal pairing, since your original ETF included more than 3,000 large, mid and small cap stocks, while your replacement includes just 500 large caps. A better solution is to find a replacement ETF that also tracks the broad market, but using a different index.

Here’s another example of how you can tripped up by subtle differences. Say  you’re using the iShares Core MSCI EAFE IMI Index ETF (XEF) to get exposure to international developed markets. A reasonable replacement for this fund might be the Vanguard FTSE Developed All Cap ex North America Index ETF (VIU), since both funds track the broad market in developed countries outside North America. But these are not ideal partners either.

The index providers MSCI and FTSE disagree about how certain countries should be classified. The most significant is South Korea, which is considered a developed market by FTSE, but an emerging market by MSCI. That means South Korea makes up about 5% of VIU, but you won’t find any Korean stocks in XEF.

As you would expect, the opposite issue arises with emerging markets ETFs. The iShares Core MSCI Emerging Markets IMI Index ETF (XEC) assigns more than 12% to South Korea, while the Vanguard FTSE Emerging Markets All Cap Index ETF (VEE) has no allocation at all.

Now, you can get around the problem by doing a double switch: in other words, by selling both XEF and XEC, and then replacing them with both VIU and VEE, or vice-versa. But that will only work if both ETFs are showing losses large enough to harvest. So it’s better to have some options for making a one-for-one switch.

In the table below, we offer suggestions for tax-loss selling ETF pairs that will allow you to maintain similar exposure to the asset class while tracking a different index. In most cases, there’s no need to switch back to the original ETF after the 30-day waiting period is over, since the suggested replacements are likely to deliver very similar performance.

Asset ClassIf you sell…Replace with…Notes
Canadian EquitiesiShares Core S&P/TSX Capped Composite Index ETF (XIC)
or BMO S&P/TSX Capped Composite Index ETF (ZCN)
Vanguard FTSE Canada All Cap Index ETF (VCN)
or Franklin FTSE Canada All Cap Index ETF (FLCD)
TD Canadian Equity Index ETF (TTP), which tracks the Solactive Canada Broad Market Index, could replace the funds in either column, though its tracking error may be higher.
US EquitiesiShares Core S&P U.S. Total Market Index ETF (XUU)
Vanguard U.S. Total Market Index ETF (VUN)Both ETFs track the broad US market and provide very similar exposure.
International EquitiesiShares Core MSCI EAFE IMI Index ETF (XEF)BMO MSCI EAFE Index ETF (ZEA)
or TD International Equity Index ETF (TPE)
ZEA and TPE include large and mid caps only, while XEF tracks a broader index. All three funds (unlike VIU) include South Korea.
Emerging MarketsiShares Core MSCI Emerging Markets IMI Index ETF (XEC)
BMO MSCI Emerging Markets Index ETF (ZEM)
ZEM includes large and mid caps only, while XEC tracks a broader index. Both funds (unlike VEE) exclude South Korea.
International and Emerging MarketsiShares Core MSCI EAFE IMI Index ETF (XEF) and iShares Core MSCI Emerging Markets IMI Index ETF (XEC)
Vanguard FTSE Developed All Cap ex North America Index ETF (VIU)
and Vanguard FTSE Emerging Markets All Cap Index ETF (VEE)
If your developed and emerging markets ETFs are both showing losses, you can replace both at the same time. Use either MSCI or FTSE indexes for both, not one of each.