Tax Loss Selling in Canada: Rules, Deadlines, and Financial Planning Angles

With the year winding down, savvy Canadian investors start thinking about tax loss selling to optimize planning opportunities and reduce tax. Tax loss selling is a planning strategy that allows investors to offset taxable capital gains by realizing capital losses in their portfolios. While relatively straightforward, the rules around tax loss selling—particularly the deadlines, superficial loss rules, and integration with broader financial goals—are nuanced.

This article provides a breakdown of the Canadian tax rules around tax loss selling, key deadlines to remember, and some financial planning considerations to help investors optimize their approach.

However, as always, we recommend holistic planning. Why? Because results depend so heavily on your personal circumstances and how various rules interact (such as Lifetime Capital Gains Exemption (LCGE), attribution rules, corporate tax rules), it’s important to work with an experienced and knowledgeable advice-only Certified Financial Planner and Tax Accountant.

What Is Tax Loss Selling?

Tax loss selling, also known as tax loss harvesting, is the practice of selling an investment at a loss to realize a capital loss.

In Canada:

The taxable portion of a capital gain, known as the inclusion rate, is 50%
Allowable net capital losses are applied against taxable capital gains. Because only 50% of gains are taxable, the capital loss offsets that taxable portion. You cannot apply capital losses against other sources of income. So, any current year losses are applied, first, against current year gains, and any remaining net losses can then be applied in the prior three years, or forward indefinitely to reduce your overall tax bill.

Therefore, a realized capital loss can be applied:

1. Against gains in the same tax year (most common).
2. Carried back up to three years to recover tax previously paid.
3. Carried forward indefinitely to offset future gains.

This flexibility highlights the importance of planning. An advice-only Certified Financial Planner is able to map out your annual taxable income and expenses in a detailed projection. This level of planning helps a client to “see around the corner” and proactively identify key tax strategies such as tax loss selling that can then be reviewed with their tax accountant.

Key Deadlines For Tax Loss Selling In Canada

Timing is crucial. Capital losses must settle in the tax year you wish to use them.

Settlement since 27 May 2024 is T+1 (trade day plus one). Therefore, the last trading day to settle in a calendar year is typically one business day before December 31. (For example, in 2025 it will be Tuesday, December 30.) However, please check your broker/exchange for the specific cut-off date each year.

Here’s the takeaway: Don’t wait until the last week of December. Advisors often recommend completing tax loss selling by mid-December to avoid unexpected issues.

Beware Of The Superficial Loss Rule

The superficial loss rule is one of the main tax traps investors need to avoid.

A superficial loss occurs when:

You (or an affiliated person, such as a spouse, corporation you control, or Registered Retirement Savings Plan (RRSP)/ Tax-Free Savings Account (TFSA) repurchase the same, or an identical asset, within 30 calendar days before or after the sale, and
You still hold that property (directly or indirectly) at the end of the 30-day period.

If a loss is considered “superficial,” it is denied for tax purposes—meaning you can’t use it to offset gains. Instead, the loss amount is added to the adjusted cost base (ACB) of the repurchased investment, deferring the loss until a later sale.

For Example: If you sell TD shares at a $10,000 loss on December 15 but your spouse buys TD shares in her TFSA on December 20, your loss will be denied under the superficial loss rules.

The superficial loss rule applies across all accounts and affiliated persons. This is particularly tricky when spouses both hold similar securities or when automatic dividend reinvestments (DRIPs) trigger small repurchases within the 30-day window.

It is worth noting that tax loss selling only applies to taxable (non-registered) accounts. Losses in registered accounts (RRSP, RRIF, TFSA, Registered Education Savings Plan (RESP), Registered Disability Savings Plan (RDSP), etc.) are not deductible. Also, an ‘in kind’ contribution to a TFSA is considered a deemed disposition at fair market value (FMV), so if FMV is less than the cost, the loss is denied for tax purposes.

This distinction creates planning opportunities:

If you’re considering moving a losing position into your RRSP, sell it in your taxable account first to crystallize the loss, then contribute cash (not the security) to the RRSP to avoid a superficial loss.
Avoid contributing an investment “in-kind” at a loss to your RRSP or TFSA—those capital losses are permanently denied.

Practical Application:

1. Tax loss selling is particularly relevant if youíve realized large gains from:

Selling a rental property
Exercising stock options
Rebalancing an investment portfolio
Selling a business (where some gains may not qualify for the LCGE)

By offsetting those gains with realized losses, you can smooth your tax bill and avoid moving into higher marginal tax brackets.

2. Cash Flow and Retirement Planning

For retirees, tax loss selling can help manage taxable income in drawdown years. For example:

If you’re withdrawing minimums from your RRIF, and in a higher tax bracket as a result, capital losses in a non-registered account may help offset gains triggered by rebalancing or selling investments for spending needs.
If you’re strategically realizing gains before Old Age Security (OAS) clawback thresholds, harvesting losses can provide room to rebalance without triggering a clawback.

3. Holding Companies And Trusts

For incorporated professionals and business owners, capital gains and losses inside a corporation or trust follow specific rules:

Losses realized in a corporation can only be used within that corporation—not on a personal return.
Similarly, in the case of trusts, whether losses can be distributed or used by beneficiaries is often limited by the trust’s terms, tax provisions and income tax rules.

This means where you hold your investments matters. Coordinating between personal and corporate accounts can optimize tax efficiency.

4. Estate Planning Considerations

Capital losses can be applied on a final return (the “terminal return”) to offset capital gains triggered by a deemed disposition of assets at death.

If large unrealized gains are expected at death, it may be prudent not to use all the capital losses during life.
A thoughtful estate plan may include leaving some positions at a loss unharvested, allowing heirs to benefit from reduced taxes on death.

5. Charitable Giving Strategies

If you plan to donate securities “in-kind” to a registered charity, you can eliminate capital gains on those securities. However, if a security has declined in value, it may make sense to sell it first to crystallize a loss, then donate the cash. This way, you benefit from both the charitable donation tax credit and the loss utilization.

Common Mistakes In Tax Loss Selling

1. Waiting until the last minute: Markets can be volatile, and missing the settlement deadline by one day means your loss won’t count until the next year.
2. Triggering superficial losses: Rebuying too soon, reinvesting dividends, or having a spouse repurchase can all deny the loss.
3. Failing to verify the ACB: Before selling securities for a potential capital loss, confirm your ACB. It’s not always just what you paid—factors like multiple purchases, corporate reorganizations, return of capital, and dividend reinvestments can adjust it. Accurately calculating the ACB ensures correct reporting of capital gains and losses.

Weighted Average: Combine all purchases of the same security across accounts; you can’t pick higher-cost shares to increase losses.
Corporate Actions: Mergers, splits, or reorganizations can change ACB.
Return of Capital: Reduces ACB.
Dividend Reinvestment: Increases ACB.

4. Using registered accounts: Selling in an RRSP/TFSA does not generate a deductible loss.
5. Not coordinating across entities: Losses inside a corporation don’t help you personally, and vice versa.
6. Ignoring the future: Harvesting losses now may not always be optimal if you anticipate large gains (such as the sale of a property or business) in future years.

Practical Process For Tax Loss Selling

1. Review your portfolio. Identify positions that are trading below the adjusted cost base.
2. Check superficial loss risks. Review spouse’s accounts, DRIPs, and registered accounts.
3. Match to gains. Decide whether to apply against current year, carry back, or carry forward.
4. Mind the deadline. Aim to sell by mid-December to avoid settlement issues.
5. Reinvest thoughtfully. If you want to stay invested in the same sector, consider switching into a similar but not “identical” security (e.g., selling one Canadian bank stock and buying another).

Tax loss selling can be a powerful tool for Canadian investors, but it’s not as simple as just selling at a loss in December. The rules, deadlines, and financial planning angles require careful attention.

When integrated into a broader financial strategy—covering retirement income planning, corporate structures, estate goals, and charitable giving—it can meaningfully reduce your long-term tax burden.

As always, investors should coordinate with their financial advisor, advice-only financial planner and tax professional to ensure tax loss selling decisions are aligned with their overall financial plan.

Nancy Grouni, CFP, PFP, Financial Planner, Objective Financial Partners Inc. Nancy had a 20-year career as an investment and insurance advisor with two large wealth management firms, building and presenting client financial plans and investment portfolio reviews, before becoming a fee-only financial planner. She specializes in financial, tax, and estate planning for incorporated business owners and professionals, sole proprietors who are considering incorporation, and retirees with investment holding companies. https://objectivefinancialpartners.com.