Tax loss harvesting Canada is a common strategy investors use to reduce investment taxes by selling losing investments to realize capital losses and offset capital gains. This guide explains how tax-loss harvesting works in Canada, the rules you need to watch (including the superficial loss rule), step-by-step processes, examples, and practical tips for Canadian investors.
What is tax-loss harvesting?
Definition: Tax-loss harvesting is the deliberate sale of investments at a loss in a non-registered (taxable) account to create a capital loss that can offset capital gains.
Why it matters: In Canada, only 50% of capital gains are taxable — the inclusion rate — so realised capital losses reduce the taxable portion of gains, lowering your tax bill.
Key Canadian tax rules to know
Capital gains inclusion: 50% of capital gains are taxable. Reportable gains and losses are calculated on the net gain/loss.
Superficial loss rule: If you or an affiliated person (including a spouse or a company you control) buys the same or an identical property within 30 days before or after the sale and still hold it during that period, the loss is denied. The denied loss is added to the adjusted cost base (ACB) of the repurchased security. See the CRA's guidance on the superficial loss rules.
Carry rules: Net capital losses can be carried back up to three years or carried forward indefinitely to offset capital gains in other years.
Registered accounts: Sales inside RRSPs, TFSAs, RESPs do not generate capital losses you can use on your tax return. Also, buying back a sold security inside a registered account within the superficial loss window can trigger denial of the loss.
Helpful government resources: see the CRA pages on capital gains and losses in English and CRA My Account for statements and slips.
How tax-loss harvesting works — step-by-step
Identify candidates. Scan your non-registered portfolio for investments with unrealized losses that you no longer want or that you're willing to sell.
Check for gains elsewhere. Confirm you have realised or expected capital gains this year (or in prior years you might carry losses back to) that the losses will offset.
Confirm "identical" risk. Decide whether you will repurchase the same security or a different one. Avoid repurchasing identical property within the 61-day window (30 days before and after sale) to prevent a superficial loss.
Sell the security. Execute the sale in your taxable account to realise the loss.
Repurchase a replacement (optional). If you want to maintain market exposure, buy a different security with similar exposure (not "identical") after considering the superficial loss rule.
Report the loss. Keep trade confirmations and report the loss on your tax return. Use T5008 or brokerage statements to help calculate proceeds of disposition and adjusted cost base.
Apply loss to gains. Use the realised loss to offset capital gains for the current year, carry back up to three years, or carry forward indefinitely.
Example (simple)
Situation: You bought 100 shares of XYZ ETF at $50 (ACB $5,000). Current market price is $30, value $3,000 — unrealized loss $2,000.
Action: Sell the XYZ ETF in your taxable account for $3,000, realising a $2,000 capital loss.
Tax effect: Capital loss = $2,000. Taxable capital loss impact = 50% × $2,000 = $1,000 reduction in taxable capital gains. If you had $10,000 of capital gains this year, taxable portion would drop from $5,000 to $4,000 (saving tax on $1,000 of taxable gains).
Strategies to avoid the superficial loss (wash sale) problem
Buy a different ETF or mutual fund that tracks the same index but is not "identical." For example, switch from one S&P/TSX fund to another fund with similar exposure but different issuer or structure.
Wait 31 days after the sale before repurchasing the same security.
Buy a related but not identical ETF (e.g., swap a Canadian large-cap ETF for a diversified Canadian equity ETF or use a broad global ETF if you want market exposure).
Use tax-loss harvesting for partial positions — sell only the loss-making portion and leave winning positions untouched.
Benefits and limits
Benefits
Immediate tax relief by offsetting capital gains.
Potentially reduce taxes over time by carrying losses forward to future years when you have gains.
Portfolio rebalancing opportunity — harvesting losses can be combined with rebalancing to desired allocations.
Limits / Risks
Superficial loss rule can deny the loss if you repurchase identical securities in the restricted window.
Transaction costs and bid/ask spreads may reduce the economic benefit.
Temporary loss of exposure if you wait 31 days to repurchase the same security can cause tracking risk.
Behavioural costs — frequent trading to harvest losses can lead to poor long-term decisions.
Practical checklist before you harvest losses
- Are the losses in a non-registered account? Harvesting in registered accounts is generally ineffective.
- Do you have capital gains to offset now or in recent years? Consider carryback rules if you had gains in the past three years.
- Have you checked the 61-day window? Avoid repurchasing identical securities within 30 days before or after the sale.
- Have you considered trading costs and potential market movement? Factor in commissions, spreads, and tracking risk.
- Is the tax saving worth the effort? Small losses may not justify trading.
When tax-loss harvesting might not make sense
You have little or no capital gains to offset and no plan to carry the loss to a year with gains.
Losses are small and transaction costs negate the tax benefit.
You hold investments for long-term reasons and changing them would undermine your strategy.
You want to repurchase the same security immediately — superficial loss rules will likely deny the benefit.
Reporting and documentation
Keep trade confirmations and brokerage statements. Use them to calculate proceeds of disposition and adjusted cost base.
Report on Schedule 3 of your tax return. Capital gains and losses are reported according to CRA guidance.
Use CRA resources and tax software. For forms, slips and online services, see CRA My Account and CRA capital gains guidance.
Working with advisors and tools
Financial advisors / tax professionals can help evaluate whether harvesting fits your situation and ensure compliance with the superficial loss rules.
Robo-advisors and some discount brokers offer automatic tax-loss harvesting features — review terms carefully and compare costs.
Checklists and spreadsheets help track ACB and loss carryforwards.
Helpful Canadian resources
Bottom line
Tax-loss harvesting in Canada can reduce the tax you pay on capital gains and give you flexibility to manage future taxable events. However, it must be used carefully to avoid the superficial loss rule and to ensure the trading costs and risks don't outweigh the tax advantages. When in doubt, consult a tax or investment professional.