Tax‑loss selling (also called tax‑loss harvesting) is a strategy that allows investors to realize capital losses and use them to offset certain taxable capital gains. Because only 50% of capital gains are included in income for Canadian tax purposes, realizing a loss has the potential to reduce how much tax you owe on gains.
How it works
When you sell an investment that has declined in value, you generate a capital loss. That loss can be applied against capital gains you realized, lowering your taxable income. If you don’t have gains in that same year, unused capital losses can be carried back up to three years or carried forward indefinitely to offset gains in other years. Suppose you sold a portion of your portfolio at a gain earlier in the year. If other holdings have declined, selling them before year‑end lets you “harvest” losses to assist with balancing the gains for tax purposes.
Why Timing Matters
To have a capital loss count in the current tax year, the trade must settle by December 31. Most Canadian and U.S. equity trades settle on a T+1 basis (one business day after execution), so placing trades by no later than December 30 is generally advisable to ensure settlement before year‑end.
The Superficial Loss Rule
The Canada Revenue Agency’s superficial loss rule prevents you from claiming a capital loss if you (or a related person, like your spouse) repurchase the same or identical security within 30 days of selling it at a loss. That means the loss cannot be used to reduce your taxable gains for that year.
To stay on top of this, it may help to track your trades carefully. Additionally, monitoring your dispositions and reviewing forms like the T5008 can make reporting smoother and enable you to better claim losses correctly.
One practical way to maintain market exposure while trying to avoid a superficial loss is to invest in a similar — but not identical — ETF or security after selling the loss position. This lets you stay invested without running afoul of the rule.
When done strategically, tax‑loss selling can provide several benefits. It can reduce the amount of tax you owe on capital gains in the current year, free up losses to offset some future gains, and help maintain your long-term investment strategy without unnecessary portfolio changes. Beyond the tax impact, it encourages regular portfolio review, giving you a chance to reassess holdings and make strategic adjustments. Qtrade’s Tax Centre can help you gather the information and key dates you need to plan effectively.