A high-net-worth client with a substantial non-registered investment account, holding Canadian dividend-paying stocks and a diversified bond portfolio, has an investment policy statement (IPS) that permits rebalancing once a year, preferably in late December. Over the past year, the equity portion of the portfolio has significantly outperformed, and the client is concerned about incurring excessive capital gains taxes during rebalancing. Which approach should the portfolio manager prioritize when implementing the annual rebalancing?

Question: A high-net-worth client with a substantial non-registered investment account, holding Canadian dividend-paying stocks and a diversified bond portfolio, has an investment policy statement (IPS) that permits rebalancing once a year, preferably in late December. Over the past year, the equity portion of the portfolio has significantly outperformed, and the client is concerned about incurring excessive capital gains taxes during rebalancing. Which approach should the portfolio manager prioritize when implementing the annual rebalancing?

Answer options:

• Minimize capital gains by selling assets with the lowest accrued gains first, even if it means deviating slightly from target weights.
• Execute rebalancing trades only after the tax year-end to shift the tax liability to the subsequent year. ✅ Utilize tax-loss harvesting opportunities by selling any holdings with unrealized losses to offset capital gains generated from rebalancing.
• Ignore tax implications, as regulatory compliance dictates strict adherence to target asset allocation within the specified period.

Correct answer: Utilize tax-loss harvesting opportunities by selling any holdings with unrealized losses to offset capital gains generated from rebalancing.

Explanation: For a non-registered account, Tax-Aware Rebalancing focuses on minimizing tax liabilities by using strategies like tax-loss harvesting. This involves selling securities with unrealized losses to offset capital gains incurred when selling overperforming assets, thereby reducing the net tax impact.