The Straddle
Todays income – next year
The Straddle is a multipart security position designed to defer taxes. The strategy is relatively simple. Two financial positions are created, that generally have high volatility and that move in opposite directions. The losing position is closed out in the name of the taxpayer in the taxation year; the portfolio re-balanced and the winning position is closed out in the following year.
Some tax law firms have their own straddle “products” for their high net worth individuals.
On March 22, 2017, CRA introduced “anti-straddle” rules designed to stop the use of this form of deferral. New technology is available to continue deferral. The various tax law firms who have been selling straddles for the last decade have a solutions for their clients, albeit how effective and at what cost is yet to be seen.
There are were a number of subtleties that were required to ensure that the plan would have survived any potential audit or attack by the Revenue authorities.
Generally speaking the costs were the market costs for holding the positions, payment to your financial broker to ensure that the position are adequately matched, and some legal fees for ensuring that all the requirements are met. These costs can vary between one and three per cent of the amount of the position. The amount of the position will equal the loss that will be taken by the taxpayer. The taxpayer will then utilized this loss to offset any income for the year. After March 22, 2017, this simplest form of arbitrage described here is no longer effective, although other related products available.
It should be noted that this is simply a deferral, albeit effective. The straddle was a form of tax arbitrage between different tax years. For other types of arbitrage, please see our tax arbitrage page.
