Tax-loss selling

Tax-loss selling means realizing a capital loss on an investment that’s down, then reinvesting in something similar so you stay in the market. The loss is a real, bankable tax asset — and your portfolio barely changes.

What a realized loss is worth in Canada

A net capital loss can:

1. Offset capital gains in the current year (both sides use the 50% inclusion rate, so they net cleanly), and
2. Be carried back up to 3 years to recover tax on gains you already reported, or carried forward indefinitely to use against future gains.

A key difference from the US

In Canada, capital losses can only offset capital gains — there’s no equivalent of the US “$3,000 against ordinary income” rule. The value comes from sheltering gains: this year’s, a prior year’s (via carryback), or a future liquidity event’s.

The superficial-loss rule

The one rule that voids the benefit

If you — or an affiliated person (your spouse, or a corporation/trust you control) — buy the identical security within 30 days before or after the sale and still hold it at the end of that window, the loss is denied as a superficial loss. The denied amount is instead added to the ACB of the repurchased shares.

Two traps that catch people:

• Registered accounts count. If you sell at a loss in a non-registered account and rebuy the same security in your RRSP or TFSA within 30 days, the loss is permanently lost — it can’t be added to a registered account’s ACB.
• DRIP and ongoing contributions. A reinvested dividend or an automatic purchase within the window can quietly trigger the rule. Turn off dividend reinvestment on the security you’re harvesting.

The clean approach: sell Fund A (say, an S&P 500 index fund) and buy Fund B that tracks a different but highly correlated index (say, a total-US-market fund). You keep essentially the same exposure without holding identical property.

When it actually matters

Tax-loss selling is valuable when you have:

• A non-registered account (it does nothing inside an RRSP or TFSA), and
• Volatility to harvest (more opportunities early in a position’s life), and
• Capital gains — this year, in the last three years, or expected soon — to apply the loss against.

Don’t let the tax tail wag the dog. Harvesting lowers your ACB, so you’re partly deferring tax, not erasing it — still worthwhile because of time-value and the chance to realize later at a lower rate or against a big future gain.

Year-end timing

“Tax-loss selling season” is December. Your trade must settle within the calendar year to count, so watch the last eligible trade date each December (settlement is now T+1).

Checklist

• Only in non-registered accounts.
• Have a pre-chosen “alternate” fund for each holding.
• Respect the 30-day window across every account, including spouse + my RRSP/TFSA.
• Never rebuy the identical security in a registered account within 30 days.
• Disable DRIP on harvest candidates; mind December settlement dates.

Next, zoom out to the goal itself: your FIRE number.