Tax Loss Harvesting: Strategic Guide

How Capital Loss Offsetting Works

Basic Rule

• Capital losses can only offset capital gains
• 50% inclusion rate applies to both gains and losses
• Net capital loss: Total losses exceed gains for the year

Carrying Losses

• Carry back: Apply to any of the 3 preceding years
• Carry forward: Apply to any future year (indefinitely)
• Must use carryback/forward forms with CRA

When to Harvest Losses

Year-End Tax Planning

• Review portfolio in December for unrealized losses
• Identify positions to sell before December 31
• Offset gains realized earlier in the year
• Settlement date must be in the tax year (T+2 for stocks)

Throughout the Year

• Market downturns create opportunities
• Don't wait until year-end if significant loss exists
• Consider losses when rebalancing portfolio

The Superficial Loss Rule

The most important rule to understand:

The 30-Day Rule

A loss is "superficial" and denied if:

• You (or affiliated person) buy identical property
• Within 30 days before OR after the sale
• And still own it at end of that 61-day period

Affiliated Persons

• Your spouse or common-law partner
• Corporations you control
• Trusts where you or spouse is beneficiary
• Your RRSP, TFSA, or RESP

What Happens with Superficial Loss?

• Loss is denied for tax purposes
• Denied loss adds to cost base of repurchased property
• You'll eventually get the benefit when you sell
• Except for RRSP/TFSA purchases—loss is permanently lost

Avoiding Superficial Loss

Strategy 1: Wait 31 Days

• Sell the losing position
• Wait 31 days before repurchasing
• Risk: Miss potential recovery

Strategy 2: Buy Similar (Not Identical)

• Sell losing ETF
• Immediately buy similar but different ETF
• Maintains market exposure
• Example: Sell XIC (iShares S&P/TSX), buy VCN (Vanguard FTSE Canada)

What's "Identical Property"?

• Same stock or mutual fund units
• ETFs tracking same index are debatable—be cautious
• Different share classes of same company (e.g., BRK.A and BRK.B)
• Not identical: Different companies in same sector

Strategic Implementation

Step 1: Identify Losing Positions

• Review non-registered account holdings
• Calculate unrealized losses
• Consider which you're willing to sell

Step 2: Review Gains to Offset

• Current year realized gains
• Expected gains before year-end
• Gains from previous 3 years (carryback option)

Step 3: Execute Trades

• Sell losing positions
• Either wait 31 days or buy similar replacement
• Document transactions for tax records

Example Scenario

Portfolio situation:

• Sold rental property: $50,000 capital gain
• Stock A: $20,000 unrealized loss
• Stock B: $15,000 unrealized loss

Strategy:

• Sell Stock A and B before December 31
• Total capital losses: $35,000
• Net taxable capital gain: $50,000 - $35,000 = $15,000
• Taxable amount (50%): $7,500 instead of $25,000
• Tax saved at 40% bracket: ~$7,000

Carryback vs. Carryforward

When to Carry Back

• Had significant gains in past 3 years
• Were in high tax bracket those years
• Get refund now for taxes already paid
• File Form T1A (Request for Loss Carryback)

When to Carry Forward

• No significant past gains to offset
• Expect large gains in future
• Losses carry forward indefinitely

Special Situations

Mutual Funds

• Year-end distributions can create gains even in down years
• Check for pending distributions before buying
• Consider switching funds before distribution date

Deceased Taxpayer

• Capital losses in year of death can offset any income
• Not just capital gains—can offset employment, pension, etc.
• Significant planning opportunity

Listed Personal Property

• Art, jewelry, collectibles over $1,000
• Losses only offset listed personal property gains
• Can carry back 3 years or forward 7 years

Common Mistakes

• Buying back too soon: Superficial loss rule denies deduction
• Spouse repurchases: Affiliated person rule applies
• TFSA/RRSP purchases: Permanent loss denial
• Missing settlement date: Trade must settle in tax year
• Not tracking ACB: Incorrect cost base calculation

Documentation Required

• Purchase confirmations (for cost base)
• Sale confirmations (for proceeds)
• Calculation of adjusted cost base
• Record of trade dates
• Documentation for carryforward/carryback

Tax Planning Tips

• Harvest regularly: Don't wait for year-end only
• Consider transaction costs: Commissions reduce benefit
• Watch for wash sale equivalents: Even different brokerages count
• Track your ACB: Use tools like AdjustedCostBase.ca
• Plan ahead: Know your expected gains before selling losers