Unlock your portfolio's hidden power: Tax-loss harvesting

Questrade, Canada’s #1-rated* online broker, empowers Canadians to become much more financially successful and secure with advanced platforms, diverse investment accounts, and $0 commissions.

Ever felt the sting of taxes on investment gains? Here's the good news: there’s a savvy strategy that can turn market dips into powerful tax savings: tax-loss harvesting. It’s not about avoiding taxes; it’s about mastering them to your advantage.

Tax-loss harvesting can strategically minimize investment taxes and truly propel your portfolio forward. Geared towards Canadian investors looking to optimize their non-registered portfolios, it’s an essential component when learning investment tax strategies in Canada. This guide will reveal what it is, why it's vital for lower taxes investing, how it aligns with capital gains tax in Canada, and practical steps, so you can learn how to tax-loss harvest for ultimate investment portfolio optimization.

What is tax-loss harvesting and how does it work?

Tax-loss harvesting in Canada is a strategic maneuver—you sell investments at a loss to powerfully offset capital gains and reduce your taxable income. If you're wondering how to tax-loss harvest, here’s how it works:

• You pinpoint an underperforming asset, realizing that loss instantly creates a powerful offset against profits made in the same tax year, cutting your capital gains tax in Canada.
• Then, you strategically reinvest the proceeds into a similar (but not identical) investment, seamlessly maintaining your overall strategy. This process offers a proactive, intelligent way to optimize your portfolio and minimize investment taxes.

Why should Canadian investors consider tax-loss harvesting?

Tax-loss harvesting is one of the most helpful investment tax strategies in Canada. Here’s how it works to your portfolio's advantage:

• Reduces current and future capital gains tax: You can use losses you "lock in" by selling an investment to directly reduce any profits you've made (capital gains) this year. Plus, if you have more losses than gains, you can even use those losses to reduce taxes from profits in the last three years, or save them to cut taxes on future profits—helping you lower your capital gains tax burden.
• Improves portfolio quality: When you sell investments that aren't doing well, you free up cash to put into better, more promising opportunities. This is a smart way to make your portfolio stronger and more effective, boosting your investment portfolio optimization.
• Maintains market exposure: You can sell a losing investment for the tax benefit, and then quickly buy a different but similar one. This means you don't miss out if the market starts to recover in that area, keeping your investments active in the market.

Understanding capital gains tax in Canada

Capital gains tax in Canada applies when you sell an investment for a profit. Only 50% of your capital gains is taxable income (called the inclusion rate). This amount is added to your other income and taxed at your marginal rate. On the other hand, when you sell an investment for a loss, you have a capital loss. You could use these losses to offset capital gains, reducing your net gain and your tax liability.

Here’s a simple example. Let's imagine you:

• Sold Stock A for a $1,000 capital gain (profit).
• Also hold Stock B, which is currently down, so you sell it for a $1,000 capital loss.

Without tax-loss harvesting: You'd pay tax on 50% of your $1,000 gain ($500 taxable income).

With tax-loss harvesting: Your $1,000 capital loss offsets your $1,000 capital gain, resulting in $0 net capital gain for the year. This means you pay no tax on that specific $1,000 profit from Stock A. It's a direct way to reduce your taxable income.

The wash sale rule: a key consideration for Canadian investors

What is the wash sale rule and how does it impact tax-loss harvesting? The "wash sale" rule (or superficial loss rule by the CRA) prevents claiming a capital loss if you (or an affiliate) repurchase the same or an identical investment within 30 calendar days before or after the sale. Breaking this rule means you won't be able to claim that capital loss for tax purposes, so be sure to follow it carefully.

How to tax-loss harvest: 5 practical steps

Implementing tax-loss harvesting into your investment portfolio optimization strategy is easy to do with Questrade. Just follow these steps:

1. Identify underperforming assets: Review non-registered accounts (Cash or Margin) for investments below purchase price.
2. Sell the losing investment: Realize the capital loss for tax purposes.
3. Wait 30 days: Follow the wash sale rule.
4. Reinvest strategically: After 30 days, repurchase the original or reinvest in a similar, non-identical asset.
5. Track your losses: Questrade helps you keep meticulous records. You’ll receive essential tax slips like the T5008, plus detailed trade confirmations and account statements. These documents, available online in your account, provide the transaction history and data to calculate your capital gains and losses.

Start turning market dips into tax savings today! Log in to your Questrade account or open a non-registered account in minutes.

What type of account do I need for tax-loss harvesting?

To engage in tax-loss harvesting, you'll need a non-registered account with Questrade—either a Cash or Margin account. This is because these accounts are subject to capital gains and losses rules. Remember, you can't use this strategy in registered accounts like RRSPs or TFSAs, as they operate under different tax-advantaged guidelines.

When to harvest losses: timing and strategy

What is the best time to perform tax-loss harvesting? Strategic timing enhances tax-loss harvesting Canada. Consider these periods for investment portfolio optimization:

• Market downturns: Provide more opportunities to realize losses.
• Year-end: Ideal for optimizing your tax situation before December 31.
• After significant gains: Directly offset previous profits.
• Portfolio rebalancing: Combine with rebalancing for dual benefits for more tax efficient investing.

Your tax advantage with Questrade

Tax-loss harvesting in Canada is a powerful strategy for investment risk management and to minimize investment taxes. By strategically realizing losses in your diversified investment portfolio, you can help relieve the burden of your capital gains tax in Canada. This proactive, tax efficient investing optimizes your portfolio and allows you to keep more of your money.

At Questrade, we provide advanced platforms,the right accounts, and robust tools to help you effortlessly implement tax-loss harvesting in Canada and master your balanced portfolio. Seize control of your tax situation and unlock your portfolio’s potential today!

Start your tax-loss harvesting journey with Questrade. Open an account.