As the year draws to a close, many Canadian investors begin reviewing their portfolios and looking for ways to reduce taxes before December 31. One strategy that often comes up in year-end planning discussions is tax-loss selling. When used properly, tax-loss selling can help offset capital gains, reduce your overall tax bill, and improve your long-term investment efficiency.
However, this strategy isn’t about reacting emotionally to market downturns or abandoning a sound investment plan. Instead, it’s a thoughtful, proactive approach that requires careful timing, an understanding of tax rules, and alignment with your broader financial goals.
In this article, we’ll explain what tax-loss selling is, how it works in Canada, who it may be appropriate for, and how to use it effectively before December 31—all while avoiding common mistakes that can reduce its benefits.
Tax-loss selling is the practice of selling an investment that has declined in value to realize a capital loss for tax purposes. That realized loss can then be used to offset capital gains, helping reduce the amount of tax you owe.
In Canada, only 50% of capital gains are taxable, and the same inclusion rate applies to capital losses. When you realize a capital loss, it can be used to:
Tax-loss selling does not eliminate losses—it simply allows you to use them strategically to improve after-tax outcomes.
To understand tax-loss selling, it’s important to understand how capital gains and losses are taxed.
For example:
If your capital losses exceed your gains in a given year, the unused portion can be carried forward or back.
Timing is critical when it comes to tax-loss selling. For a capital loss to count in the current tax year, the trade must settle by December 31.
In Canada:
Waiting until the final days of the year can create unnecessary risk, especially during periods of high market volatility or reduced holiday trading hours.
Tax-loss selling is not suitable for every investor or every situation. It tends to be most beneficial when:
If you’ve realized capital gains earlier in the year perhaps from rebalancing, selling a property, or exiting an investment—tax-loss selling can help reduce the tax owed on those gains.
If you expect to be in a higher tax bracket in the future, carrying losses forward may provide greater long-term value.
If an investment has declined and no longer aligns with your risk tolerance, time horizon, or objectives, selling it for a tax loss can be both financially and strategically sound.
Year-end is often a natural time to rebalance. Tax-loss selling can complement rebalancing by making the process more tax-efficient.
One of the most common—and costly mistakes investors make is violating the superficial loss rule.
Under this rule, a capital loss is denied if:
If a loss is deemed superficial:
This rule prevents investors from selling solely to trigger a tax loss and then immediately buying back the same investment.
There are several ways to manage around this rule while staying invested:
Selling the investment and waiting more than 30 days before buying it back allows the loss to be realized legitimately. However, this may expose you to market risk during the waiting period.
Instead of repurchasing the same ETF or stock, you may be able to buy a similar investment that provides comparable market exposure without being considered “identical” under CRA rules.
In some cases, holding cash briefly may be appropriate, particularly if markets are volatile or your portfolio already has sufficient exposure elsewhere.
Each approach has trade-offs, and the right choice depends on your overall plan.
It’s important to distinguish tax-loss selling from emotionally driven decisions.
Tax-loss selling:
Emotional selling:
A properly structured tax-loss strategy does not mean abandoning your investment plan it means improving it.
Tax-loss selling only applies to non-registered (taxable) accounts.
Capital losses cannot be claimed in:
In fact, selling at a loss in a registered account provides no tax benefit, and if you contribute funds to repurchase the same investment in a TFSA or RRSP, the loss is permanently lost for tax purposes.
This distinction makes it especially important to coordinate year-end strategies across all account types.
Many investors forget they may already have unused capital losses from prior years.
Carried-forward losses can be:
Reviewing your tax history can uncover planning opportunities that don’t require selling any investments at all.
Tax-loss selling should never be done in isolation. It works best when integrated with:
This is where professional advice becomes especially valuable. The rules are nuanced, and the consequences of missteps—such as denied losses or unintended asset allocation changes can outweigh the benefits.
Before implementing tax-loss selling, be mindful of these common errors:
Avoiding these pitfalls requires both technical knowledge and strategic oversight.
Tax-loss selling can be a powerful year-end planning tool when used thoughtfully and correctly. It can help reduce taxes, improve after-tax returns, and align your portfolio more closely with your long-term objectives.
However, it is not a one-size-fits-all solution. The effectiveness of tax-loss selling depends on your income level, existing gains and losses, account structure, and overall financial plan.
Working with a professional advisor ensures that tax strategies like this are implemented carefully, compliantly, and in a way that supports not undermines your long-term success.
At Dunbrook Associates, we help clients integrate tax-efficient strategies like tax-loss selling into a comprehensive financial plan. By coordinating investment management with tax planning, we aim to improve after-tax outcomes while keeping you focused on what matters most—your long-term financial security.
If you’re considering year-end tax planning or want to review your portfolio before December 31, we’re here to help guide the process.
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