Understanding tax‑loss selling
At year‑end many investors review their portfolios to see which positions have lost value. Those losses can be used to reduce the tax bill on any capital gains realized during the same year. By selling a security at a loss, the deficit can offset gains from better‑performing holdings, lowering the amount of tax owed when the return is filed.
How the offset works
Consider a stock bought for $10,000 that is later sold for $7,000. The $3,000 capital loss can be deducted against any capital gains you have. If your gains total $5,000, the loss reduces the taxable amount to $2,000. If you have no gains in the current year, the loss can be carried back up to three years to offset earlier gains, or it can be carried forward to future years.
Accounts where tax‑loss selling applies
The strategy is limited to taxable, or non‑registered, accounts. Losses incurred inside a TFSA, RRSP, RESP or similar registered plan cannot be used to offset gains outside those accounts. Furthermore, the losses may only be applied against capital gains; they cannot be deducted from employment, interest or other regular income.
Important rules to follow
The Canada Revenue Agency disallows a “superficial loss.” If you sell a security at a loss and then repurchase the same or an identical security within 61 days — starting 30 days before the sale and ending 30 days after — the loss cannot be claimed. This rule extends to your spouse or common‑law partner, any corporation you or your spouse control, and other affiliated persons.
Integrating tax‑loss selling into your plan
Experts stress that tax‑loss selling should not be pursued in isolation. It works best when it aligns with your broader investment and financial objectives. Making portfolio decisions solely for short‑term tax benefits can undermine long‑term goals, so the tactic should support, not drive, your overall strategy.
Tax‑loss selling is not an investment strategy
While the technique can reduce taxes, it is not a substitute for sound investment choices. Financial planners advise using tax‑loss selling to complement a well‑thought‑out plan, rather than letting tax considerations dictate which securities you hold or sell.
