Tax-Loss Harvesting
Selling an investment at a loss to offset capital gains and reduce your tax bill.
Tax-loss harvesting is a strategy where you sell an investment that’s gone down in value to create a capital loss. That loss can then be used to offset capital gains you’ve made elsewhere, reducing the total tax you owe.
How it works
Say you sold Stock A earlier this year for a $5,000 capital gain. In a non-registered account, you’d owe tax on that gain. But if you also have Stock B sitting at a $3,000 loss, you could sell Stock B and use that loss to reduce your taxable gain to $2,000.
If your losses are larger than your gains in a given year, you can carry the unused losses back up to three years or forward indefinitely to offset future gains.
Important rules in Canada
The CRA has a rule called the superficial loss rule. If you sell an investment to claim a loss and then buy the same investment (or something nearly identical) within 30 days before or after the sale, the CRA disallows the loss. This means you can’t just sell and immediately rebuy the same thing to get the tax benefit.
A common workaround is to sell one ETF and buy a similar but not identical one. For example, selling a Canadian equity ETF from one provider and buying a comparable one from a different provider.
When it makes sense
Tax-loss harvesting is only relevant in non-registered (taxable) accounts. Inside a TFSA or RRSP, gains and losses don’t affect your taxes, so there’s nothing to harvest. It’s most useful when you have realized gains to offset and investments sitting at a loss that you were considering selling anyway. Our non-registered account guide covers strategies like this in more detail.
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