What if a losing investment could lower your tax bill?
In Canada, a loss on an investment can cancel out tax on your gains. Tax-loss harvesting is the habit of using that on purpose.
How it works, in three steps
- 1Sell an investment that is worth less than you paid for it, in a regular (non-registered) account. Losses inside an RRSP or TFSA do not count.
- 2Use the loss against your capital gains. It cancels gains from the same year, can be carried back up to three years to recover tax you already paid, or carried forward with no expiry.
- 3Buy something similar so you stay invested, but not the identical investment (see the 30-day rule below).
You are not avoiding tax for good. The replacement investment has a lower cost base, so you owe more tax on its future gain. What you get is a tax bill that is smaller now, and later or never if you hold on, which is worth having.
A simple example
You bought an investment for $10,000 and it is now worth $7,000. Selling realizes a $3,000 loss. Earlier this year you sold another investment for a $5,000 gain.
Your net gain drops to $2,000. Only half of a capital gain is taxable, so you report $1,000 instead of $2,500. In a 40% tax bracket that cuts the tax from $1,000 to $400, a saving of $600. The figures are round numbers for illustration; your bracket changes the answer.
Is this for me?
It may fit if you
- Hold investments in a non-registered account
- Sold something for a gain this year, or in the last three years
- Own an investment that is currently worth less than you paid
- Are happy to swap into a similar, not identical, investment
Think twice if you
- Only invest inside an RRSP or TFSA, where this does not apply
- Have no gains to offset, now or in the last three years (the loss can still carry forward)
- Would pay trading costs that eat most of a small loss
- Or your spouse might buy the same investment within 30 days
The honest catches
- The 30-day rule. If you or your spouse buy the identical investment within 30 days either side of the sale, the CRA can deny the loss. The next quick guide covers it.
- It is a deferral. Your lower cost base brings a larger taxable gain later.
- Costs and timing. Trading fees, the gap between selling and buying, and year-end settlement dates all matter.
This is education, not tax, legal or investment advice. Talk to a licensed Canadian chartered professional accountant or certified financial planner before you act.
See what it could save you
Enter your gains, losses and tax bracket to estimate the tax you could save.
Open the Tax-Loss Harvesting Calculator