What T+2 means for tax timing

On Sept. 5, 2017, Canada joined the United States in the move to a two-business-day securities settlement cycle—or T+2, as it’s more often phrased. The new cycle applies to trading of individual equities and most debt securities, and the purchase of most mutual funds.

Principally, T+2 is about efficiency for the capital markets.

After all, it’s a one-third reduction from the previous T+3 cycle, noted Keith Evans, executive director of the Canadian Capital Markets Association (CCMA), in a release. He said the move “lowers risk and speeds up the time within which buyers will get their securities and sellers will get their money.” Further, he emphasized that T+2 “reduces risk in the overall system.”

Tax, timing and trade settlement

In addition to increasing market efficiency and decreasing risk, the change has tax implications, particularly when the trade date and settlement date straddle a key date. Year-end is the critical timing that comes to mind, as taxpayers generally report taxes on a calendar basis.

In turn, the types of transactions advisors are likely to focus on are those expected to yield a capital gain or capital loss. Capital losses are often promoted as part of strategic tax-loss harvesting, as losses can offset gains in the current year, back three years or forward indefinitely. Especially when gains have been reported three years prior, it’s crucial that a trade settles and the loss is realized as intended.

To be clear, the potential tax effects shouldn’t drive investment decisions. Those are a matter between investor and advisor looking at the portfolio as a whole, and at each holding on its own merit.

But, where a transaction is already contemplated, the tax effect is a central consideration for timing. This was true before the move to T+2, and continues to be so.

Year-end can be sooner than you think

While it’s not rocket science to calculate a handful of days into the future, year-end awareness layers on top of a longer planning exercise. For example, the trading decision should dovetail with the portfolio, which in turn is based on the client’s goals. This helps identify which holdings might be appropriate candidates for disposition.

And advisors without discretionary trading authority must meet with investors to obtain trade authorization. That practical but potentially inconvenient requirement is further challenged by busy holiday social calendars in December.

Under T+3 there was also the trickiness of working back from the statutory holidays, specifically Christmas Day and Boxing Day. This year is the prime example of how early you must get that trade in before year-end. With Dec. 31 on a Sunday, the trade would have to settle by Friday, Dec. 29, meaning the trade itself would have been required by Friday, Dec. 22.

Into the future with T+2

With Friday, Dec. 29 as the required settlement date, this year’s final trade date under T+2 is Wednesday, Dec. 27.

In fact, Dec. 27 is the earliest trade date that would ever apply. The move to T+2 eliminates the need to factor in the statutory holidays, and you can just look at the day of the week on which Dec. 31 falls.

Doug Carroll , JD, LLM (Tax), CFP, TEP, is Practice Lead — Tax, Estate & Financial Planning at Meridian.

Doug Carroll

Tax & Estate

Doug Carroll, JD, LLM (Tax), CFP, TEP, is a tax and estate consultant in Toronto.