With the close of 2023 fast approaching, late December is a key time for Canadian investors and their advisors to review taxable, non-registered investment accounts. The fourth quarter is the moment to take stock of gains and losses and, where appropriate, act to reduce your tax bill before year-end.
If you’ve realized significant taxable capital gains this year, a deliberate tax-loss selling approach—also called tax-loss harvesting—is one of the most effective ways to limit taxes owing on those gains.
What is tax-loss selling in Canada?
Tax-loss selling is a tax planning technique used in non-registered accounts to offset realized capital gains. The basic idea is to sell investments that have declined in value to create capital losses you can use against capital gains in the same tax year. If you don’t use losses in the current year, the Canada Revenue Agency (CRA) allows you to carry them back up to three years or carry them forward indefinitely to offset future gains.
Definition of tax-loss harvesting
Tax-loss harvesting, or tax-loss selling, involves selling holdings in non-registered accounts that have declined in value to generate capital losses. Those losses can offset capital gains realized in the same year, be carried back three years, or carried forward indefinitely. When using this approach, be careful to avoid triggering the CRA’s superficial loss rule.
Read the full definition of tax-loss harvesting in the MoneySense Glossary.
Capital gains and capital losses
In Canada, a capital gain arises when you sell an asset—such as stocks, bonds, certain commodities, or other property—for more than its adjusted cost base (ACB), which is the purchase price plus any acquisition costs. By contrast, selling for less than the ACB produces a capital loss.
The math is simple: buy a stock for $100 and sell it for $200 and your capital gain is $100. The CRA treats 50% of that capital gain as taxable income. So in this example, $50 would be added to your taxable income and taxed at your marginal tax rate. Registered accounts such as RRSPs and TFSAs shelter capital gains from tax, but taxable, non-registered accounts do not.
Capital losses can be used to offset capital gains reported in the same tax year. If they aren’t used immediately, those losses can be carried back to offset gains in any of the three previous years or carried forward indefinitely to offset future capital gains—losses don’t expire.
As an investment advisor, I monitor clients’ portfolios year-round so we have a clear picture of realised and unrealised gains and the opportunities for tax-loss selling before year-end.
Tax-loss selling, explained
When implementing tax-loss selling, be strategic about which positions you choose to sell. Ideal candidates are holdings that no longer fit your investment objectives or risk tolerance, or that you believe have limited prospects. You can also target investments that are down now but have long-term potential—selling to harvest a loss with the intention of re-establishing the exposure later.
What is a superficial loss in the eyes of the CRA?
The CRA’s superficial loss rule prevents taxpayers from selling an asset to create a deductible capital loss and then repurchasing the same or identical property within a 30-day window (either before or after the sale) if they, or an “affiliated person,” still hold or buy the asset. If repurchase occurs within that period, the loss is denied as a deductible tax loss and is instead added to the ACB of the newly acquired property.
Bottom line: to preserve a claimable capital loss, wait beyond the 30-day period before buying the same or substantially identical investment back.
Benefits of implementing a tax-loss selling strategy
A thoughtful tax-loss selling strategy can deliver multiple benefits:
- Offset capital gains and lower the tax you pay on taxable investments.
- Use losses in your portfolio to limit the drag from underperforming holdings.
- Reduce taxes payable in future years by preserving losses to carry forward.
Tax-loss selling also presents a practical opportunity to rebalance your portfolio. For investors who saw outsized gains in certain sectors—technology, for example—this can be a sensible time to restore your intended asset allocation and risk profile while realizing tax benefits.
Who should implement a tax-loss selling strategy
Tax-loss selling is not a one-size-fits-all solution. Consider the following before acting:
- Your risk profile and time horizon,
- Overall investment objectives,
- Current and expected income level,
- Your marginal tax rate,
- The overall impact of realizing specific gains or losses on both your tax bill and long-term portfolio performance.
If you are in a relatively low tax bracket, it may make sense to prioritize long-term capital appreciation over harvesting losses. Also, be mindful of timing: trades that generate losses intended for that tax year should be executed with enough time for settlement so they are captured by year-end; generally give yourself at least a week before December 31 to ensure the transaction is recorded.
What happens to the markets in November and December
Historically, late-year months can feature short-term volatility as individual and institutional investors harvest losses and lock in gains. These seasonal sell-offs are often temporary and don’t typically alter longer-term market trends. Still, it’s wise to anticipate some price movement as year-end tax planning activity picks up.
Further reading about investing strategy:
- What Canadian investors can do in times of world crisis and war
- Attention, Canadian investors—the “Magnificent Seven” stocks are dominating
- How recession fears are shaping investor behaviour and emotions