Use tax-loss selling, or tax-loss harvesting, to offset your taxable capital gains in Canada.

Tax-loss selling (or tax-loss harvesting) occurs when you deliberately sell a security at a loss in order to offset capital gains in Canada. With tax loss selling in Canada, you can then use these losses to offset your taxable capital gains. Can tax loss harvesting offset dividends in Canada as well? It’s a common question.

This year, the last day in 2024 for tax-loss selling is December 27, 2024. If you sell at a loss on or before that date (for example a stock listed on the Toronto Stock Exchange) you are able to deduct your loss against your 2024 capital gains. However, for tax-loss harvesting purposes, you can also carry your loss back for the previous three years to offset capital gains in Canada, or carry it forward indefinitely to offset future capital gains. But can tax loss harvesting offset dividends too?

As Canadian capital gains tax is lower than the tax on interest and on dividend income, capital gains are a very tax-advantaged form of income. However, since most investors have income of all three types, here are three strategies, beyond tax-loss harvesting, for structuring investment portfolios to minimize the tax burden. )Note that tax loss selling in Canada is a secondary strategy. The below are key, primary strategies):

1. It is usually best to hold any common shares outside of an RRSP (as dividend income and capital gains are taxed at a lower rate than interest income), and interest-paying investments in an RRSP. That’s because all income taken out of an RRSP is taxed at the rate on interest.
2. More speculative investments are best held outside of an RRSP. If investors hold them in an RRSP and they drop, investors not only lose money, but they can’t use the losses to offset any taxable gains from other investments.
3. Regarding mutual funds outside an RRSP, the main consideration is that mutual funds make annual capital gains distributions even if investors continue to hold the fund units. Investors then pay Canadian capital gains tax on half of any realized capital gains. So you are best to hold mutual funds in an RRSP and common stocks outside. You won’t realize capital gains on common stocks until you sell. (Note that common stocks are still okay to hold in an RRSP, especially if that’s all you hold in your portfolio.) But can tax loss harvesting offset dividends from mutual funds outside an RRSP?

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A properly structured investment portfolio can let you take advantage of the low tax rates on capital gains and dividend income while sheltering your higher-taxed interest income in your RRSP. If you make dividends or capital gains in an RRSP, you gain the tax shelter of the RRSP, but when you withdraw the funds from your RRSP they are taxed, as mentioned, at the same rate as interest income. This means you would lose out on the lower tax rates offered. So can tax loss harvesting offset dividends earned in an RRSP? The answer is no.

What to be aware of regarding capital gains tax in Canada

Whenever you’re considering making use of tax-loss selling, or tax-loss harvesting, to minimize capital gains in Canada, you should also be aware of the “superficial loss rule”. This rule applies to tax loss selling in Canada and states that if an investor, their spouse or a company they control, buys back a stock or mutual fund within 30 days of selling it, then they are not permitted to claim the capital loss for tax purposes (tax-loss harvesting). Failing to obey the 30-day rule will result in the capital loss being disallowed.

There are some ways to keep exposure to stocks during the 30-day period. For example, if you decide to sell your resource shares to realize a capital loss, but then you decide that resource stocks are poised for a rebound, you can buy a resource-heavy exchange-traded fund (ETF) to keep yourself exposed to that sector. Or you could buy shares in a company that is in a similar business as the one you sold (such as selling TC Energy and buying Canadian Utilities).

When considering the use of tax loss selling in Canada, it pays to remember that it’s always a good time to sell bad stocks, or stocks that are wrong for your portfolio. But you need to balance that rule against the fact that in the final couple of months of the year, some investors dump stocks without thinking, just to cut their taxes. In some cases, they simply want to sell and be done with it. In others, they intend to buy the stock back after 30 days (as we mentioned, if you buy back any sooner, you cannot deduct your loss.)

As a result, stocks that have been weak tend to stay weak in the final month or two of the year. But the best of the bunch can put on extraordinary recoveries when tax-loss selling season ends.

In fact, we see buying opportunities for the best of these fallen stocks before the new year and even as other investors are looking to use them as part of their own tax-loss selling strategy. Read our report on several stocks we recommend as tax-loss buys for right now. 

In summary, tax-loss selling, or tax-loss harvesting, is a strategy used in Canada to offset capital gains by deliberately selling securities at a loss. The losses can be carried back three years or forward indefinitely to offset past or future capital gains. However, tax-loss harvesting cannot be used to offset dividend income. To minimize the tax burden, it’s generally best to hold common shares outside of an RRSP, interest-paying investments inside an RRSP, and more speculative investments outside an RRSP. Mutual funds are best held in an RRSP to avoid paying capital gains tax on annual distributions. The “superficial loss rule” prevents investors from claiming a capital loss if they or a related party buy back the security within 30 days of selling. While tax-loss selling can present buying opportunities, investors should be cautious not to make costly mistakes based solely on tax considerations.

Bonus tip: Don’t let tax considerations spur you to make a costly selling mistake with tax-loss harvesting. With tax loss selling in Canada, you can always sell next year and carry your loss back.

Did you find my tips on capital gains tax helpful? Please share your thoughts in the comments section.

This post was originally published in 2015 and is regularly updated.