Tax-Loss Harvesting for Canadians
How to use investment losses to offset capital gains and reduce your tax bill. Understand the superficial loss rule, timing strategies, and which accounts to harvest from.
Tax-loss harvesting is the strategy of selling investments at a loss to offset capital gains and reduce your tax bill. In Canada, capital losses can be applied against capital gains in the current year, carried back three years, or carried forward indefinitely. Since only 50% of capital gains are taxable (the inclusion rate), a $10,000 capital loss offsets $10,000 of capital gains, saving you tax on $5,000 of taxable income.
The most important rule to know is the superficial loss rule (Section 54 of the Income Tax Act). If you or an affiliated person (spouse, corporation you control) buys the same or identical property within 30 calendar days before or after the sale, the loss is denied. This means you cannot sell a stock to realize a loss and immediately buy it back. You must wait at least 31 days, or buy a similar but not identical investment (for example, switching from one Canadian equity ETF to a different one tracking a similar index).
Effective tax-loss harvesting strategies include: reviewing your non-registered portfolio in November/December for unrealized losses, pairing losses against gains realized earlier in the year, and keeping a watchlist of substitute investments for the 30-day waiting period. Remember that losses can only be claimed in non-registered accounts — losses inside TFSAs, RRSPs, or other registered accounts have no tax value. Always factor in trading commissions and any changes in asset allocation when deciding whether a harvest is worthwhile.