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May 26, 2025

Tax-Loss Selling: A Hopeful Prospect For Investors In Down Markets?

by Julie Petrera

The Toronto Stock Exchange (TSX) and the Standard & Poors 500 Index (S&P) both delivered strong returns in 2024, on top of strong returns the preceding year, with both exchanges ending 2023 and 2024 on a high note. Markets so far this year have performed less steadily, and investors may be experiencing losses. But losses, under certain conditions, could present a hopeful prospect: Tax-loss selling.

Tax-loss selling, also known as tax-loss harvesting, is a tax and investment planning strategy that investors with losses in non-registered accounts can implement to reduce tax on capital gains. The strategy involves selling an investment at a loss to offset a past, present or future gain to avoid, reduce or reclaim tax on the gain.

Capital gains or losses are calculated as the disposition of property minus the total of your investment’s adjusted cost base (ACB), less any expenses associated with buying/selling or holding the investment.1 However, it is the net gain that is taxable. Therefore, capital losses can offset the tax payable on capital gains:

  • in the same year as the gain; 
  • in the past three calendar years (use line 25300 of your tax return); or 
  • in the future.

This means you can go back and reclaim the tax you already paid on prior year gains by using Form T1A2. And yes, you can carry losses you trigger in the current year forward indefinitely. But should you trigger losses in your investment portfolio solely to reduce tax? Only you can decide. Let’s review the rules, the math, and the considerations and risks of tax-loss selling to help you make that decision.

The Rules

The Canada Revenue Agency (CRA) outlines what constitutes an allowable capital loss that can be used to offset a capital gain. For a capital loss to be allowable:

  • You must sell an investment that you have owned for more than 30 days.
  • The investment must be sold, it cannot be transferred to a registered plan (like an RRSP).
  • You must not re-purchase the investment within 30 calendar days following the sale. 
    • You must not purchase a substantially similar investment within 30 days following the sale (called identical property or substituted property); and 
    • A person you are affiliated with must not re-purchase identical property within 30 days following the sale. Affiliated persons include:
      • Your spouse or common-law partner
      • Corporations that you or your spouse/partner control entirely or as partners
      • Trusts where you or your spouse are the primary beneficiary.

Failure to adhere to these rules will result in the losses being disallowed, as they would be considered “superficial losses”, and cannot be applied against capital gains.

The Math

To calculate a capital gain or loss, subtract the total of your investment’s ACB less any expenses incurred to sell the property, from the proceeds of the disposition.

For example, let’s assume that Mark bought 500 shares of SUN Corporation for $10 per share, with no commission, so his total ACB is $5,000. Six months later Mark sells the SUN shares for $13 per share, less $25 commission and receives $6,475. Mark has a gain of $1,475. Assuming 50% of this gain is taxable, Mark’s taxable capital gain is $737.50. This is not the amount of tax Mark pays; this amount would be taxable at Mark's marginal tax rate3.

However, we must consider that Mark also bought 500 shares of SKY for $10 per share with no commission, and these shares fell in value to $6 per share. Mark sold the SKY shares at $6 with no commission and received $3,000, resulting in a $2,000 capital loss. The allowable capital loss would be $1,000.

When filing his taxes, Mark will calculate his net gain/loss as $1475 minus $2,000 for a net loss of $525, or taxable capital loss of $262.50. Assuming no other dispositions this year4, Mark would not have to pay any tax on gains this year, as his gain was fully offset. Further, he can apply the $262.50 loss to capital gains he previously paid tax on in the preceding three calendar years or carry this loss forward indefinitely to offset future taxable capital gains.

The Risks

If you have taxable capital gains (past or present) in a non-registered plan, and want to offset the tax, consider the following risks inherent in applying this strategy. 

There could be transaction costs, such as commissions, associated with selling securities to trigger losses, buying replacement investments, or re-buying the original investments more than 31 days in the future.

There could be additional accounting costs if you engage an accountant to file your taxes and apply losses to previous or future year returns.

Since you must remain uninvested in identical or substituted property, you may risk losing out on returns, especially amongst volatility (which the markets in 2025 have been experiencing); and

You will not participate in any income or dividends the investments you sold earn during the time you are not invested.

Some of these risks may be offset by holding alternative (non-identical or substituted) investments, or by the tax you will save or reclaim. Since taxable capital gains are taxed at an investor's marginal tax rate, this strategy may be more valuable for investors in higher marginal tax brackets.

The Decision

Only you (and your financial advisor and accountant) can determine the validity and value of this strategy for you based on your individual and personal tax profile, investment objectives and risk tolerance. While this strategy may help address your overall financial goals, make sure it makes sense for you, and as they say: “Don’t let the tax tail wag the dog”.  

Julie Petrera, MBA, CFP, CIM is a certified financial planner. X (Twitter): @petrerajulie

 

1      https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-25300-net-capital-losses-other-years.html

2      https://www.canada.ca/en/revenue-agency/services/forms-publications/forms/t1a.html

3      Since tax on gains is ultimately paid at the taxpayer's marginal tax rate, this strategy may be more beneficial for investors in higher marginal tax brackets

4      Note: Gains and losses can be triggered at any time, and in any order throughout the year.