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Investors can use this strategy to reduce taxes in certain investment accounts. Find out how tax-loss harvesting works and what to avoid.
Tax-loss harvesting, or tax-loss selling, is a strategy for reducing tax in non-registered accounts. Investors sell money-losing investments, triggering capital losses they can use to offset capital gains incurred the same year. Tax losses can also be carried back three years or carried forward indefinitely.
When using this strategy to save on taxes, take care to avoid triggering the superficial loss rule. This applies if you repurchase the same investment or an identical one within 30 days of the settlement date of the sale, and it eliminates the tax benefit. The superficial loss rule extends to affiliated persons as well—spouses, corporations or other entities as defined by the CRA.
Example: “Mel sold his shares of a money-losing bank stock to trigger capital losses he could use to offset his gains on profitable trades. He still wanted exposure to the banking sector, however, so he bought an ETF invested in a basket of Canadian banks.”
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