Addendum to previous post regarding trade date vs. settlement date
I received a comment regarding the previous post on trade date vs. settlement date through email. It is comprehensive enough that I will just quote it here and thanked the individual in question for providing it.
Thank you for your posts. Regarding your post at https://divestor.com/2009/12/22/canadian-tax-rules-about-year-end-selling-trade-date-vs-settlement-date/, the link to IT-133 is broken. This is because the CRA cancelled the IT some time ago. I had considerable trouble finding out what happened to the IT, and whether or not it was due to a policy change at the CRA. So I wrote the CRA seeking a ruling on the issue of Trade vs. Settlement date. This was my reply:
Although IT-133 was cancelled, the comments contained therein continue to apply. The comments contained in paragraph 2 therein states as follows:
For the usual transactions on a Stock Exchange there is a disposition and acquisition of shares traded on a Stock Exchange, by the vendor and purchaser, respectively, on the settlement date which is the time designated by the Stock Exchange, usually two or three days subsequent to the trade date, on or before which the vendor is required to deliver the share certificates and the purchaser is required to make payment therefore.
We trust our comments will be of some assistance.
INCOME TAX RULINGS DIRECTORATE
FINANCIAL INDUSTRIES DIVISIONPlease feel free to share the response publicly, but please keep my name private.
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.
Genworth MI books a one-time gain
Genworth MI Canada (TSX: MIC) made an announcement today that reflected changes to the underlying legislation, the Protection of Residential Mortgage or Hypothecary Insurance Act and the impact on its balance sheet.
It had been accruing a government guarantee fund that was funded through gross premiums that effectively functioned as a corporate equivalent of an RRSP, with the difference being that there was an exit fee of 1% for every year the funds were deposited into the fund. Any deposits in the fund were tax deductible, but any withdrawals would be taxable.
In the new regime, this fund is now going to be collapsed, but without the exit fee. Thus, the company is basically going to book the exit fee (after taxes) as a gain, which will amount to about $135 million or about $1.37/share.
In exchange, the company is now going to contribute 2.25% of gross premiums to the federal government (as an expense and not into a guarantee fund) and their minimum capital test amount will be going up to an internal level of 185% (required is 175%) from the present 145% (required is 120%).
The implication here is that the company will be making more money in the future (all things being equal; this does not account for the decreases in real estate transaction volume that will be decreasing the premiums written in the future) and the company will have a relatively large amount of capital freed up to examine other options, including dividends or share buybacks. Management was previously burnt by spending $160 million on June 30, 2011 on a share buyback at $26/share. In light of the fact the company is trading well under book value, it would not surprise me to see them consider another one, or they could give out another dividend.
Investors would be cautioned that MIC will likely do what is in the best interests of Genworth (NYSE: GNW) as they own 57.5% of the company.
Shares of MIC are up 3.6% at present.
Assurant – Hurricane Sandy Losses
Assurant (NYSE: AIZ) reported after-market hours today that their loss exposure to Hurricane Sandy will be $200-$220 million and this is the only insurable event that will cost them more than $5 million to date for the quarter. The quarterly (year-end) report is due in February 2013.
In after-tax terms, this translates into about $127-$140 million or about $1.60-1.76/diluted share. This is better than what I was expecting in terms of damage, although you could see this already baked into the market price when looking at a stock graph:
It became apparent that Hurricane Sandy would be causing significant damage to the New York area at the end of October and investors subsequently took the stock down farther than what was likely warranted.
In terms of capital reserves, Assurant’s holding company has $617.6 million in available capital as of the end of September, which they keep $250 million reserved away, so this upcoming loss, while unfavourable, is not going to interrupt the company from continuing to mint money with its share repurchase program. Needless to say, I still view Assurant as a very good opportunity at present for appreciation.
If the market decides to take Assurant’s stock price lower from present levels, I will continue to add to my position.