Cash Call

It happens. The car blows its transmission. A deal too good to miss comes up. The CRA comes knocking. You need more cash than you have on hand. But you have a bunch of money invested in stocks. OK, problem solved. You’ll sell a few shares.

Which shares? From which accounts?

This is where having a financial adviser might well be a good idea, but if you don’t, you have basically your gut instincts and a few basic concepts.

Basic concept number one is that you have two sorts of accounts, registered and unregistered. Registered accounts come in two sorts, RSP and TSFA. While you can sell shares you hold in your RSP, your withdrawals are subject to tax at your marginal rate and, just to make it a bit more unattractive, your withdrawal will be subject to withholding which can run as high as 20%. It's not an ideal option.

Shares in a TSFA can be sold and the money taken out without tax consequences. It is non-reportable. However, if you sell shares at a loss that loss is not deductable. And, if you are at your contribution limit, you can’t replace the money you take out until the next calendar year or you run the risk of “over-contributing”. The non-deductibility of losses and the tax-exempt status of any gains gives you a hint on what to sell in your TSFA: it may be time to take a righteous profit on winners in that account.

The logic is different in your unregistered account. Here you pay full capital gains on your winners and can take capital losses on your losers. However, there is no withholding on unregistered accounts so you’ll be able to take all the cash.

This is not tax advice. Rather it sets the lay of the land.

OK, what to sell? It is human nature to want to take profits and avoid crystalizing losses. After all, Eastern Moosetrack Ltd was a great story, after a couple of drinks, two years ago and it might come back from its current $0.015 to the $0.15 you paid for it. On the other hand, Consolidated Metals is only up 35% and you know it will be rerated just as soon as the new results are out. But you need cash, now.

In an unregistered account selling big losers gives you big tax losses which can offset the tax payable on your winners. It’s painful to recognize the loss but it is soothing to know you will offset the tax consequences of selling a winner. (One note: your unregistered account often has a margin balance. Be mindful of this as not all the securities in the account will be marginable and if you sell something that secures your margin your cash problem just got bigger, not smaller.)

In your TSFA you have a different calculus - and one which should have informed which shares you bought in this account - a losing bet is just that. If you sell you take the loss with no offset. But you also can take the profit on a winner with no tax.

When a cash call happens, and it will, thinking clearly about the relative advantages of selling various shares in your TSFA and unregistered accounts can make it somewhat less painful.

Then it is down to individual cases. Why do you own the shares of XYZ Co? At one point you thought you would make money by owning them. Have you? If you have and the shares are in your TSFA they are a candidate for sale. In your unregistered account, different story as you’ll be paying capital gains, but those may be offset when you dump losers.

As you sort through winners, losers and “not quite yets” looking for a set of sales which meet the cash call number, the old maxim, “No one was ever fired for taking a profit.” will come in handy. Obviously, for your winners, but also for shares where you sold a chunk of the position earlier and are now playing with “house money”.

Taking a profit in your TSFA makes a lot of sense. But it also makes sense to sell only a portion of your position in a stock you think has a chance of going higher or which pays a dividend.

Taking a profit also makes sense in your unregistered account but here you can calculate the profit and sell stone-cold losers to offset that profit. Aiming for a tax neutral way of meeting your cash call will make the process less painful.

Once you have made your selections step away from your computer. Take a walk, have dinner, you want to be sure. Then sell and move on.

Remember it takes three business days for stock transactions to “settle”. Until then, you will not actually have the cash.

A cash call is a, sometimes difficult, opportunity to look carefully at your positions. A crash edit as it were. Usually not a lot of fun but, long run, it forces you to take a hard look at your whole stock universe and consider your options.

[Disclaimer: This is not investment advice. I am not an investment professional. I am down about 30% at the moment. I will write about companies that I hold. I will disclose any holdings. Do your own due diligence.]