Tax-loss selling
Tax loss selling involves selling an investment that has decreased in value to offset a realized capital gain from a sold investment that increased in value. For example, if you sell an investment with a $10,000 taxable capital gain, you may be able to sell another investment to offset some or all of the tax you would be required to pay on that gain.
You could also sell assets in order to reclaim tax paid in the previous three calendar years, or to realize losses to carry forward into future years. To carryback a capital loss, you must complete Revenue Canada Form T1A – Request for Loss Carryback. You do not have to file an amended return for the year in which you want the loss applied. Speak with your tax professional for additional details.
Tax-loss selling rules
There are rules that guide the use of tax-loss harvesting. First, any gains triggered in the current year must be offset first before carrying the realized capital loss back or forward. For example, if you have a $10,000 capital loss and a $4,000 capital gain in the current year, the loss must first be applied to the gain, and the resulting net loss of $6,000 can then be carried forward or backward to other years. You cannot elect to pay taxes on the $4,000 gain and carry the full $10,000 loss to other years.
Once capital gains from the current year have been reduced to nil, you can carry the capital gain forward to future years.
Tax-loss selling 30-day rule: Superficial losses
The Government of Canada does not permit you to trigger superficial losses. According to the Government of Canada a superficial loss occurs when “you dispose of capital property for a loss and both of the following conditions are met:
- You, or a person affiliated with you, buys, or has a right to buy, the same or identical property (called “substituted property”) during the period starting 30 calendar days before the sale and ending 30 calendar days after the sale.
- You, or a person affiliated with you, still owns, or has a right to buy, the substituted property 30 calendar days after the sale.”
Rather than selling and waiting for 30 days following the trade date to re-purchase, another strategy would be to substitute an investment that provides similar exposure. For example, if you sold a US equity mutual fund and realized a capital loss, but still want to maintain the same exposure to US equities, consider purchasing US equity fund or exchange traded fund.
Affiliated persons
You or a person affiliated with you cannot buy the same or identical property for 30 days following the trade date. However, what is considered an affiliated person?
Some examples of affiliated persons include:
- your spouse or common-law partner
- your TFSA or RRSP (or other registered account)
- a corporation that is controlled by you or your spouse or common-law partner
- a partnership and a majority-interest partner of the partnership
- a trust and its majority interest beneficiary (generally, a beneficiary who enjoys much of the trust income or capital) or one who is affiliated with such a beneficiary
Additional considerations of tax-loss harvesting
A capital loss may also be denied on an in-kind transfer of an existing investment in a non-registered account to an RRSP or TFSA (or other registered account). Investors generally cannot claim a capital loss on an in-kind contribution. In order to create a capital loss, they would have to first sell the investment in their non-registered portfolio, and then make the RRSP or TFSA contribution with the cash proceeds from the sale. However, you (and affiliated persons, including your RRSP or TFSA) cannot re-purchase the same investment within the 30 days after the sale of the investment.
The risks of tax-loss harvesting
While tax-loss harvesting can be advantageous, there are risks.
These include:
- The fact that you (and affiliated persons) will not be able to hold the investment you have just sold for at least 30 days following the trade date, or any investment that is remarkably similar.
- If your intention is to repurchase the same investment after 30 days, you will be unable to participate in any income, dividends or gains you would otherwise have earned during the 30-day period.
- There could also be costs to buy and sell securities.
What’s unique for capital gains & losses in 2025 and beyond?
The Government of Canada proposed changes to the capital gains inclusion rate as of June 25th, 2024. For 2025 when you have capital gains, 50% of that gain is taxed at your marginal tax rate up to $250,000 in gains. Capital Gains over $250,000 in a particular year are taxed at 2/3rds of your marginal tax rate.
If you have a net capital loss for 2025, meaning your losses in 2025 are greater than your gains in 2025, you can choose to carry these losses backward up to three years or carry them forward indefinitely. Transitional rules apply to carry back and carry forward under the proposed amendment to affect the capital gains rate increase.
If you're carrying back to 2023 and before 50% inclusion rate applies. If you are carrying the loss to a period with multiple inclusion rates, such as 2024, the loss will be applied to the gain with the highest inclusion rate first.
If you have questions about the proposed Capital Gains inclusion rate changes, speak with a tax professional and your Edward Jones Financial Advisor, who can help you with strategies to minimize your tax burden.
