Trade date vs. Settlement date, calendar year, capital gains, Canada vs. USA

This is my first post about taxation in quite some time, but it is mostly a re-hash of my December 2009 post on the matter.

Taxation should always be a consideration in financial decision-making – e.g. all things being equal it should be preferential to include interest income in your tax-deferred accounts versus Canadian dividend income. At the end of the year, there are always decisions to be made with respect to determining when to crystallize income and/or losses through dispositions of securities.

In Canada, the calendar year where you dispose of securities is determined by the settlement date. In other words, you had until today (December 24) to sell your publicly traded securities since the settlement is 3 business days ahead – a trade today is settled on December 31st because of the Christmas holiday schedule. The TSX takes December 25 and 26th off.

If you decide to unload your shares on the TSX on December 27th, the settlement will be on January 2, 2013.

However, the Nasdaq and NYSE are open on December 26th, so if you dispose of your US shares on that date, the settlement will still be in 2012.

The taxation rules in the USA are slightly different – trade date is when your securities are disposed of, not settlement date. As far as the IRS is concerned, if you unload your shares on December 31st, that is a current year disposition and not the next calendar year.

This is one of the subtle quirks between the Canadian and US tax systems.