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You may have heard the term tax loss harvesting or tax loss selling. Did you know that it could help you significantly reduce your tax burden over a period of time? Read on to see how it may be possible to use tax loss harvesting to your advantage.
What is tax loss harvesting?
When you sell an investment within a non-registered account, such as a stock or a bond, for less than its adjusted cost base (ACB), it generally triggers a capital loss. The ACB of a particular investment is typically determined by adding the cost to acquire the investment plus any expenses to acquire it, such as commissions and legal fees.
A capital loss (when realized) can then be used to offset capital gains realized in the year. This is known as tax-loss harvesting (or tax-loss selling). In instances where your allowable capital losses exceed your taxable capital gains in a particular year, you'll have what is know as net capital losses. You can carry back net capital losses to use in the three preceding years to apply against taxable capital gains in those years or carry them forward indefinitely to reduce taxable capital gains in subsequent years, which can be a way for investors to reduce their taxes payable.
How does tax loss harvesting works?
In Canada, you can apply capital losses against capital gains. In this way you may be able to lower or even nullify any taxes owed as a result of a capital gain by simply selling an investment that has an unrealized loss to offset the gain. This allows you to achieve a certain amount of tax savings.
While this article offers general guidance, it is not tax or investment advice. It is always in your best interest to work with a tax or investment professional who can offer personalized support.
Key factors to consider
- Superficial Loss: When employing tax-loss harvesting, it is important to be aware of the “superficial loss” rule. In particular, investors looking to apply a realized capital loss against realized capital gains must be mindful that they (or an affiliated person,such as a spouse) should not purchase/repurchase the same investment (or an identical investment) during a period starting 30 calendar days before the sale and ending 30 calendar days after the sale. For example, if you were to dispose shares of a stock, and repurchase the same stock within a 30-day period before and after the sale, the "superficial loss" rule will come into effect. The result is the capital loss cannot be applied against your capital gains in the year. Instead, you would typically be allowed to add the amount of the superficial loss to the adjusted cost base of the substituted investment.
- Portfolio Rebalancing: Tax-loss harvesting can be used as an opportunity to rebalance a portfolio by reinvesting proceeds into assets that align with your objectives and risk tolerance. Remember to pay special attention to the ACB. This will help determine the capital losses (or capital gains) on each asset.
- Inclusion Rate: This can help calculate the taxable capital gain or allowable capital loss for the year. For 2025, the inclusion rate is 50%. You simply multiply capital gain or capital loss for the year by this rate to help determine the tax burden on resulting capital gains. The rate has fluctuated over the years. Due to this, the net capital losses of previous years are dependent on the inclusion rate that was in effect at the time.
- Long-term strategy: Consider effective tax planning to determine the impact to your investment decisions. Attributes of different securities (like asset allocation, future outlook, overall investing strategy and financial goals) can help you to decide whether to hold or to sell.
- Eligibility: Tax loss harvesting only applies to investments sold in non-registered accounts. Capital gains tax does not apply to investments held inside registered accounts, such as a Registered Retirement Savings Plan (RRSP) or Tax Free Savings Account (TFSA).
- Year-end deadline: To offset capital gains realized in a calendar year, capital losses must be settled within that same year. For example, a capital gain of $2,000 realized in March, can be offset by a capital loss of $2,000 realized in May of the same year. As noted earlier, to the extent allowable capital losses are more than taxable capital gains in a particular year, the difference between the two becomes part of the calculation of net capital loss for the year. Net capital losses may be applied against taxable capital gains of the 3 preceding years or to any future years.
On a final note
Tax-loss harvesting can be a powerful tool that can help reduce a person’s overall tax burden. Being proactive and understanding the options available ahead of time can help you identify the best strategy to support your needs. However, it's always best to consult with a tax professional to understand how these rules apply to your individual circumstances.
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