Tax Loss Harvesting: Turning Losses into Tax Savings
When your investments drop in value, there's a silver lining: you can sell to crystallize a capital loss, then use that loss to offset capital gains. Here's how to do it right in Canada—and avoid the traps.
How Capital Losses Work
In Canada, only 50% of capital gains are taxable. The flip side: only 50% of capital losses are deductible. When you realize a capital loss, you can use it to:
- Offset capital gains in the current year
- Carry back to offset gains in the previous 3 years
- Carry forward indefinitely to offset future gains
The ability to carry back is particularly valuable—if you had a big gain last year and a loss this year, you can get a refund.
The Superficial Loss Rule
Critical rule: If you sell a security at a loss and buy the "same or identical" security within 30 days before or after the sale, the loss is denied. This is the superficial loss rule.
The 30-day window applies in both directions—30 days before and 30 days after the sale. It also applies to purchases by your spouse or a corporation you control.
What Counts as "Identical"?
- Same stock = identical
- Different share classes of same company = usually identical
- Different ETFs tracking same index = not identical
- Stock vs. ETF containing that stock = not identical
The Workaround: Substitute Securities
You can maintain market exposure while harvesting the loss by switching to a similar (but not identical) investment:
- Sell TD stock, buy RBC stock
- Sell S&P 500 ETF from iShares, buy S&P 500 ETF from Vanguard
- Sell Canadian bank ETF, buy individual bank stocks
After 31 days, you can switch back if you prefer your original holding.
Year-end timing: To claim a loss in the current tax year, you must settle the trade by December 31. With T+2 settlement, this typically means trading by December 27-28.
When Tax Loss Harvesting Makes Sense
- You have capital gains to offset (current year or carry-back)
- You can find a suitable substitute investment
- Transaction costs don't eat the tax savings
- You're willing to wait 31 days to repurchase (if desired)
When It Doesn't Make Sense
- You have no gains to offset and don't expect any soon
- The loss is small relative to trading costs
- You're in a registered account (RRSP, TFSA)—no capital gains tax anyway
- You can't find an acceptable substitute and don't want to be out of the market
How Talk Through Wealth Helps
Track your tax situation and identify opportunities:
- Monitor unrealized gains and losses across accounts
- Calculate potential tax savings from harvesting
- Track the 30-day superficial loss windows
- Model carry-back scenarios for previous years
- Factor losses into your overall tax planning
Optimize Your Tax Losses
Join the waitlist to track and harvest capital losses effectively.
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