Tax-loss harvesting is one of the few legal ways to reduce your investment taxes. By strategically selling investments at a loss, you can offset capital gains and lower your tax bill — while staying fully invested in the market.
How tax-loss harvesting works
Step 1: Identify losses
Review your non-registered investment accounts for holdings trading below your purchase price (adjusted cost base); if needed, use the ACB calculation guide before harvesting.
Step 2: Sell the losing investment
Sell the position to realize the capital loss.
Step 3: Use the loss to offset gains
Capital losses offset capital gains dollar for dollar. Only 50% of net capital gains are taxable, so a $10,000 loss offsets $10,000 in gains, saving you tax on $5,000 of included income.
Step 4: Reinvest in a similar asset
To maintain your portfolio allocation, buy a similar (but not identical) investment. For example, if you sold a Canadian equity ETF, buy a different Canadian equity ETF.
Example
| Transaction | Amount |
|---|---|
| Sold XIC at a $5,000 loss | -$5,000 capital loss |
| Realized capital gains from other sales | +$12,000 capital gain |
| Net capital gain after harvesting | $7,000 |
| Taxable amount (50% inclusion) | $3,500 |
| Tax saved (at 40% marginal rate) | $1,000 |
Without harvesting, you would pay tax on $6,000 (50% of $12,000). With harvesting, you pay tax on $3,500 (50% of $7,000).
The superficial loss rule
The CRA’s superficial loss rule states that if you (or an affiliated person, including your spouse or a corporation you control) buy the same or identical property within 30 calendar days before or after the sale, the loss is denied.
The 61-day window
The rule applies to a 61-day window: 30 days before the sale, the day of the sale, and 30 days after.
| Day | Can You Repurchase? |
|---|---|
| Day 1: Sell at loss | — |
| Days 2–31: Wait | No (superficial loss if you buy back) |
| Day 32+: Safe to repurchase | Yes |
What counts as “identical property”
- Same stock (selling and rebuying Apple = superficial loss)
- Same ETF (selling and rebuying XEQT = superficial loss)
- Different ETF tracking the same index may be acceptable (selling XIC, buying VCN — debatable, but generally accepted)
Substitute investments
To stay invested during the 30-day window, buy a similar but not identical investment:
| Sold | Substitute (Buy Instead) |
|---|---|
| XIC (iShares Canadian equity) | VCN (Vanguard Canadian equity) |
| XUU (iShares US total market) | VUN (Vanguard US total market) |
| XEF (iShares international) | VIU (Vanguard international) |
| Individual stock | A sector ETF containing that stock |
Carrying losses forward or back
| Situation | What to Do |
|---|---|
| Losses > Gains this year | Carry the net loss back to offset gains from the past 3 years |
| Still have excess losses | Carry forward indefinitely to offset future gains |
| No previous gains and no current gains | Carry the loss forward — it never expires |
To carry a loss back, file a T1A (Request for Loss Carryback) with your tax return or send a letter to the CRA.
When to harvest tax losses
End of year
December is the most common time because you know your full-year capital gains and can make strategic decisions. Remember, trades must settle by December 31 (so sell by December 29 in most years).
After a market drop
Market corrections create harvesting opportunities across many holdings. You can reduce your cost base and bank losses for future use.
After rebalancing
If rebalancing triggers capital gains (selling winners), check for offsetting losses in other holdings.
When not to harvest
- In registered accounts — No tax benefit
- If transaction costs are high — Commissions can eat into the savings (less relevant with $0-commission brokers)
- If you cannot find a good substitute — Being out of the market for 30 days carries risk
- If the loss is trivially small — Not worth the effort for a $50 loss
Bottom line
Tax-loss harvesting is free money — you are reducing your tax bill without changing your investment strategy. The key rules are: only in non-registered accounts, respect the 30-day superficial loss window, and use substitute investments to stay invested. Use our capital gains tax calculator to estimate your savings.
Canadian superficial loss vs. US wash-sale rule
Canadians investing in US markets or using US-listed ETFs need to know that Canada’s superficial loss rule and the US wash-sale rule are similar in concept but different in scope:
| Feature | Canada superficial loss | US wash-sale rule |
|---|---|---|
| Window | 30 days before + 30 days after sale | 30 days before + 30 days after sale |
| Applies to | Canadian tax residents on all accounts | US taxpayers on taxable accounts |
| Affiliated persons | Spouse + controlled corporation included | Spouse included |
| RRSP/TFSA repurchase? | Yes — buying same security in RRSP within window triggers superficial loss | Different US rules apply |
| Consequence | Loss denied; added to ACB of repurchased security | Loss deferred until replacement sold |
For Canadians, repurchasing in an RRSP or TFSA counts as repurchasing by an affiliated person. Selling a US ETF in your TFSA and rebuying it in your taxable account within 30 days denies the loss.