For Canadian investors who have achieved significant taxable capital gains, now is the time to implement a tax-loss selling strategy—the most effective way to find tax savings.
What is tax-loss selling in Canada?
Tax-loss selling is an investing strategy designed to offset taxable capital gains and reduce your tax bill. It involves selling investments to trigger a capital loss and claiming them against capital gains.
Definition of tax-loss harvesting
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.
Read the full definition of tax-loss harvesting in the MoneySense Glossary.
Capital gains and capital losses
In Canada, when you sell appreciable assets such as stocks, bonds, precious metals, real estate, or other property for more than the purchase price of the investment plus any acquisition costs—a.k.a. the adjusted cost base (ACB)—this is called a capital gain.
The math is pretty straightforward. If you bought a stock for $100 and sold it for $200, the capital gain is $100. The Canada Revenue Agency (CRA) requires you to report the capital gain as income on your tax return for the year the asset was sold. And, 50% of its value is considered taxable, based on the rate of your income tax bracket.
In this example, the taxable income is $50 ($100 x 50%), which is taxed at your marginal tax rate. The CRA does not tax capital gains inside registered accounts such as registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs).
On the flip side, when you sell an investment for less than its ACB, this is considered a capital loss. The CRA allows Canadian taxpayers to use capital losses to offset any capital gains.
Unlike capital gains, capital losses can be reported on your tax return in any of the three years prior to the loss or to offset future capital gains. Capital losses have no expiration date.
As an investment advisor in Canada, I track my clients’ portfolios throughout the year to have a clear view of their capital gains’ position and opportunities to minimize tax. That’s when tax-loss selling comes into play.
This was helpful. I may have missed it, but does this apply to TFSAs? They are non-registered but not taxed – so does that mean you can’t use a loss here against other accounts that are taxable?
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Thanks, This is helpful. What’s not clear to me is if the $3000 limit is the maximum capital loss allowable before or after the 50% reduction. In other words, can I claim a $6000 loss knowing that the allowable capital loss will then be $3000. As opposed to a $3000 maximum capital loss limit that translate into a $1500 allowable capital loss.
Hi Richard, Due to the large volume of comments we receive, we regret that we are unable to respond directly to each one. We invite you to email your question to [email protected].