TAX PLANNING

Tax loss harvesting (TLH) is a Canada-specific strategy that allows investors to realize capital losses in non-registered accounts and use them to reduce taxable capital gains. Under Canadian tax rules, 50% of net capital gains and losses are included in income, and net capital losses can be applied against gains in the current year, carried back up to three years, or carried forward indefinitely.

A tax loss harvesting strategy can improve after-tax outcomes without changing long-term investment intent—but the rules are technical. The superficial loss rule can deny a loss if the same or an identical property is repurchased within a 30-day window before or after the sale and is still owned 30 days later, creating a 61-day settlement-based window to manage carefully. Timing also matters more after Canada’s move to T+1 settlement, which can affect year-end cutoffs and superficial-loss calculations.

This guide explains how TLH works under 2025 rules, including execution steps, replacement strategies for index investors, and proper reporting, so realized losses deliver the intended tax result.

What Is Tax Loss Harvesting?

Tax loss harvesting is a tax-planning strategy that involves selling an investment in a non-registered (taxable) account for less than its adjusted cost base (ACB) to realize a capital loss. That capital loss can then be used to offset taxable capital gains, reducing the amount of investment income subject to tax.

In Canada, TLH only applies to non-registered accounts. Capital gains and losses inside registered plans, such as TFSAs, RRSPs, RRIFs, and RESPs, are not taxable and therefore cannot be harvested for tax purposes. As a result, TLH is primarily relevant for investors who hold ETFs, stocks, or mutual funds in taxable brokerage accounts.

Investors can use tax loss harvesting for several reasons. A common benefit is lower current-year taxes by offsetting realized capital gains. TLH can also support portfolio rebalancing, allowing an investor to exit underperforming positions while maintaining market exposure through a replacement investment. In addition, selling and repurchasing a different security can help reset ACB, which can simplify future tracking and reporting.

At a high level, the math works as follows. Suppose an investor realizes $10,000 in capital gains during the year and also sells a losing investment with a $6,000 capital loss. The net capital gain becomes $4,000. With Canada’s 50% capital gains inclusion rate, only $2,000 is included in taxable income instead of $5,000 without the harvested loss. The loss reduces taxes, even though the investment itself declined in value.

Importantly, tax loss harvesting does not eliminate investment losses or create free money. It simply can accelerate the tax benefit of a loss by putting it to use sooner, either now or in future years.

Canadian TLH rules are often compared to the U.S. “wash-sale rule,” but they are distinct. Canada uses the CRA superficial loss rule, which has different definitions, timing, and consequences—making Canada-specific guidance essential when applying this strategy.

Canadian Rules: Losses, Accounts, and ACB

Understanding where capital losses apply and how they are calculated is essential for using tax loss harvesting correctly in Canada. The rules are strict, and missteps can result in denied losses or incorrect reporting.

Where Capital Losses Apply

Capital losses are only recognized in taxable (non-registered) investment accounts. These include standard brokerage accounts holding stocks, ETFs, mutual funds, or other capital property.

Losses realized inside registered plans are not deductible and cannot be harvested. This includes:

• Tax-Free Savings Accounts (TFSAs)
• Registered Retirement Savings Plans (RRSPs) and RRIFs
• First Home Savings Accounts (FHSAs)
• Registered Education Savings Plans (RESPs)
• Registered Disability Savings Plans (RDSPs)

Selling an investment at a loss inside a registered account provides no tax benefit. In addition, losses realized in a taxable account may be denied under the superficial loss rule if an identical security is repurchased inside a registered account during the restricted window—an often-overlooked risk when multiple accounts are involved.

How Capital Losses Can Be Used

Once a capital loss is realized in a taxable account, it becomes a net capital loss. Under current CRA rules:

• Losses can offset capital gains in the same tax year.
• Unused losses can be carried back up to three years to recover tax previously paid on capital gains.
• Losses can be carried forward indefinitely to offset future capital gains.

Capital losses cannot be applied against employment income, interest, or dividends. They are strictly limited to capital gains.

The Role of Adjusted Cost Base (ACB)

The adjusted cost base determines whether a sale results in a capital gain or loss. ACB generally includes:

• The purchase price of the investment.
• Trading commissions and acquisition costs.
• Reinvested distributions from ETFs or mutual funds.

For pooled investments such as ETFs, mutual funds, and stocks purchased in multiple transactions, Canada uses a pooled ACB method. All identical units are averaged together rather than tracked lot by lot.

Common ACB Errors

ACB errors are a leading cause of incorrect capital gains reporting. Common issues include:

• Forgetting to include commissions in ACB.
• Ignoring reinvested distributions or return-of-capital adjustments.
• Failing to pool identical shares across multiple purchases.
• Relying solely on brokerage statements, which may be incomplete.

Reporting Capital Losses

Capital dispositions and losses are reported on CRA Schedule 3, which flows into the T1 return. Accurate ACB tracking is critical to ensure losses are correctly calculated, reported, and available for current or future tax use.

The Superficial Loss Rule (and How One Can Avoid It)

The superficial loss rule is one of the most important and commonly misunderstood parts of tax loss harvesting in Canada. Even when an investment is sold at a loss in a taxable account, the CRA may deny that loss if certain conditions are met.

How the 30-Day Window Works

A capital loss is considered superficial if all three of the following occur:

1. An investment is sold at a loss.
2. The same or an identical property is purchased within the 30 calendar days before or after the sale.
3. The investor (or an affiliated person) still owns the identical property 30 days after the sale.

This creates an effective 61-day window centered on the sale date. With Canada’s move to T+1 settlement, the timing of both the sale and any replacement purchase must be considered based on settlement dates, not just trade dates.

Who Counts as an Affiliated Person

The rule applies not only to the investor but also to affiliated persons, which include:

• A spouse or common-law partner.
• A corporation controlled by the investor or spouse.
• A trust or partnership controlled by the investor.
• Registered accounts, such as RRSPs, TFSAs, RRIFs, FHSAs, and RESPs.

A common pitfall occurs when an investor sells at a loss in a taxable account while an identical ETF is purchased in a TFSA or RRSP during the restricted period.

What Happens When a Loss Is Superficial

When a loss is deemed superficial:

• The capital loss is denied for the current year.
• The denied loss is added to the ACB of the replacement investment.
• The tax benefit is deferred until the replacement investment is eventually sold.

The loss is not eliminated, but it cannot be used immediately.

Practical Ways to Avoid Superficial Losses

Strategies often used by investors include:

• Switching to a similar but not identical ETF to maintain market exposure. Example: VCN to XIC to ZCN (Canadian equity exposure via different index providers).
• Waiting at least 31 days before repurchasing the same investment.
• Avoiding purchases of identical securities in a spouse’s account or any registered account during the window.

Identical vs. Not Identical

Generally considered identical:

• Same ETF ticker.
• Same mutual fund series.
• Same stock or class of shares.

Generally not identical:

• ETFs tracking different indexes, even in the same asset class.
• Different providers’ ETFs with similar mandates.
• A stock and an ETF holding that stock as part of a broader index.

Because CRA does not publish an exhaustive list, investors can focus on economic exposure without duplication, rather than assuming similar means identical.

Dates, Deadlines, and T+1 Settlements

For tax loss harvesting to apply in a given tax year, the sale must settle in that calendar year, not merely be traded before year-end. This distinction is critical when planning December transactions.

What T+1 Settlement Means

As of May 2024, Canada moved from T+2 to T+1 settlement for most equity and ETF trades. Under T+1, a trade settles one business day after the trade date. The settlement date—not the trade date—determines the tax year in which a capital gain or loss is realized.

For year-end tax loss harvesting, this means:

• A trade executed on December 31 will typically settle in January and count toward the following tax year.
• To realize a capital loss in the current year, the final trade date is usually the second-last trading day of December, assuming no market holidays.

Exact dates vary year to year based on weekends and exchange calendars, so investors can confirm the exchange’s year-end settlement schedule.

December Harvesting Implications

With T+1 settlement, the window for year-end TLH is slightly tighter but simpler than under T+2. Investors harvesting losses near year-end must also consider how settlement timing interacts with the superficial loss rule, which is tied to settlement dates rather than trade dates.

Mutual Fund Settlement Differences

Not all investments settle on T+1:

• ETFs and most stocks are typically T+1.
• For mutual funds, settlement can range from T+1 to T+3, depending on the fund structure and dealer.

Because mutual funds often have longer settlement cycles and earlier daily cut-off times, their effective TLH deadline may occur earlier in December. This is especially relevant for investors holding legacy mutual funds alongside ETFs.

What to Expect for 2025

For the 2025 tax year, investors can plan for:

• T+1 settlement for ETFs and equities.
• Earlier cut-offs for mutual funds.
• Final TLH trades are likely occurring before the final week of December.

Confirming settlement timelines in advance helps ensure harvested losses fall into the intended tax year and are not deferred unintentionally.

Inclusion Rate Update for 2025

The capital gains inclusion rate determines how much of a realized capital gain (or loss) is included in taxable income. In Canada, only the included portion—not the full gain—is subject to tax at an investor’s marginal tax rate.

Inclusion Rate in 2025

For the 2025 tax year, the capital gains inclusion rate remains 50%. This means:

• 50% of a net capital gain is included in income.
• 50% of a net capital loss becomes an allowable capital loss that can offset taxable gains.

Earlier proposals to increase the inclusion rate above a $250,000 annual threshold were deferred and ultimately cancelled, leaving the long-standing 50% rate in place for 2025.

How the Math Works

The inclusion rate applies after gains and losses are netted.

Example:

• Realized capital gain: $10,000.
• Inclusion rate: 50%.
• Taxable capital gain: $5,000.

If a $6,000 capital loss is harvested in the same year:

• Net capital gain: $10,000 − $6,000 = $4,000.
• Taxable portion: $4,000 × 50% = $2,000.

Tax loss harvesting reduces the taxable amount by shrinking the net gain before the inclusion rate is applied.

How the Inclusion Rate Affects TLH Strategy

The inclusion rate directly influences the value of harvested losses:

• A higher inclusion rate increases the tax impact of both gains and losses.
• Each dollar of capital loss offsets a larger amount of taxable income when inclusion rates are higher.

As a result, TLH tends to be more valuable for investors with large realized gains, higher marginal tax rates, or significant taxable portfolios.

Planning Considerations

When inclusion-rate changes are proposed or anticipated, investors often reassess:

• Whether to realize gains earlier at a lower inclusion rate.
• Whether to harvest losses sooner to offset higher-taxed gains.
• How loss carryforwards may be applied under future rules.

Even with a stable 50% inclusion rate in 2025, understanding how the rate interacts with realized gains helps ensure tax loss harvesting decisions are grounded in current law rather than speculation.

How to Harvest Losses Step-by-Step

Tax loss harvesting may work best as a structured workflow. The goal is to realize a capital loss in a non-registered account, maintain appropriate market exposure, and ensure the loss is not denied under the superficial loss rule.

1. Identifying Unrealized Losses in Taxable Accounts Only

Starting by reviewing non-registered holdings to find investments trading below their adjusted cost base is usually the first step. Brokerage platforms often display a “book value,” but this figure can be incomplete—especially for ETFs with reinvested distributions or return of capital—so it can be treated as a guide, not a final confirmation.

2. Confirming ACB Accuracy

Before any trade, people often verify ACB using an ACB tracker (spreadsheet or dedicated tool). For ETFs and mutual funds, confirming that:

• Purchases are correctly pooled across identical units.
• Commissions are included.
• Reinvested distributions and return-of-capital adjustments are reflected (this step prevents accidentally harvesting a smaller loss than expected—or realizing an unexpected gain).

3. Estimating the Tax Benefit

TLH may be useful when there are realized capital gains to offset. Calculating how much of the harvested loss is likely to be usable now versus carried forward/back. For example, realized gains of $10,000 and a potential harvested loss of $6,000 produces a net gain of $4,000. With a 50% inclusion rate, the taxable portion becomes $2,000 instead of $5,000 without the loss.

4. Checking Superficial-Loss Risk Across All Accounts

Reviewing activity in the 30 days before and after the intended sale, across:

• The same taxable account.
• A spouse/common-law partner’s accounts.
• Corporate/informal accounts controlled by the investor.
• Registered accounts, which can trigger denial if they buy/hold the identical property (if an identical purchase occurred recently, or an automatic contribution will buy the same ETF soon, either adjust timing or pick a replacement that is not identical).

5. Choosing a Replacement to Stay Invested

Canadians often select a similar but not identical ETF or asset to maintain exposure while avoiding superficial loss issues. The replacement meaningfully matches the target allocation (e.g., broad U.S. equity exposure) without being the same fund.

For example (for illustrative purposes only):

• Selling VTI (CAD-listed wrapper or U.S.-listed) at a loss.
• Buying XUU (a Canadian-listed U.S. total market ETF) the same day.

Investors often use this strategy to keep comparable U.S. equity exposure while avoiding a repurchase of the identical property.

6. Executing the Sell Order

A sell order is executed for the loss position within the non-registered account. Given that settlement timing is a factor near the end of the calendar year, the transaction is verified to ensure settlement occurs within the intended fiscal period.

7. Buying the Replacement the Same Day

To reduce the time out of the market, people usually purchase the chosen replacement ETF immediately after selling. This can keep portfolio exposure aligned with an index approach while the harvested position remains out of the account during the superficial-loss window.

8. Updating ACB Records and Notes

The disposition date, proceeds, adjusted cost base (ACB), and realized loss are recorded for tax reporting purposes. Documentation is also maintained regarding the replacement purchase and the rationale for its selection, such as a different index provider or investment mandate. Detailed records facilitate the tax preparation process and provide supporting documentation for potential audits.

9. Mutual Fund TLH: Handling Settlement and Cut-Offs

For mutual funds, confirm dealer cut-off times and settlement (often T+2/T+3). A loss may not land in the expected tax year if the order misses the daily NAV processing cut-off. If maintaining exposure, one may consider a replacement fund or ETF that is not identical and can be purchased immediately.

10. Preparing for Tax Filing (Schedule 3)

At tax time, dispositions can be reported on Schedule 3, using accurate ACB and proceeds. Keeping trade confirmations, distribution slips (e.g., T3/T5 where applicable), and ACB worksheets together so the reported gain/loss matches the harvesting plan can help.

Replacement Ideas to Keep Invested

When tax loss harvesting, investors often look for replacement holdings that maintain similar market exposure without triggering the CRA’s superficial loss rule. A key requirement is that the replacement security is not “identical” to the one sold, even if it targets the same asset class.

The below examples are for illustrative purposes only and do not constitute a recommendation to buy or sell these specific securities.

Canadian Equity ETFs

Examples often referenced:

• VCN ↔ XIC ↔ ZCN

These funds all provide broad Canadian equity exposure but are issued by different providers and track different underlying indexes. Because they are not based on the same index methodology and are structured as separate funds, they are generally treated as not identical, despite similar market behavior.

U.S. Equity ETFs

Examples often referenced:

• VUN ↔ XUU ↔ ITOT

Each fund offers broad U.S. equity exposure but differs by provider, index construction, and domicile. Canadian-listed ETFs, such as VUN and XUU, are commonly contrasted with U.S.-domiciled ETFs, such as ITOT, though tax considerations differ by structure.

International ETFs

Examples often referenced:

• XEF ↔ VIU ↔ ZEA

These ETFs all target developed international markets but track different indexes and are managed by different providers, which helps distinguish them for superficial-loss purposes.

Bond ETFs

Examples often referenced:

• VAB ↔ XBB ↔ ZAG

While all focus on Canadian investment-grade bonds, they vary in index composition, duration profiles, and fund management approaches, making them distinct funds rather than identical properties.

Why These Are Generally Not “Identical”

Under CRA guidance and common interpretation, securities are less likely to be considered identical when they differ in:

• Fund provider or issuer.
• Underlying index or benchmark.
• Portfolio construction or weighting methodology.
• Legal fund structure.

Similarity in performance or asset class alone does not make two investments identical.

Important Structural Note

U.S.-domiciled ETFs held in taxable Canadian accounts may introduce additional considerations, including foreign withholding taxes, estate tax exposure, and reporting complexity. These structural differences further distinguish them from Canadian-domiciled ETFs but also require careful understanding before use.

This section is intended to illustrate the concept of “similar but not identical” holdings, not to prescribe specific trades or portfolio decisions.

Scenarios and Common Pitfalls

Tax loss harvesting becomes more complex in real-world conditions, especially during periods of market stress or when multiple accounts and instruments are involved.

During market selloffs or crashes, bid–ask spreads often widen, and liquidity can thin out. This can reduce the net benefit of TLH, as transaction costs and temporary price dislocations may offset part of the tax advantage. Rapid market moves can also increase the risk of selling and repurchasing at materially different prices within a short window.

Corporate and holding-company accounts introduce additional superficial-loss risk. A loss realized in a personal taxable account can be denied if an identical security is purchased in a corporation controlled by the same individual (or vice versa) during the restricted period. Coordination across personal, spousal, and corporate accounts is essential.

For U.S. securities, foreign exchange adds another layer. Capital gains and losses are calculated in Canadian dollars, not U.S. dollars. A security may show a loss in USD terms but produce a gain in CAD due to currency movements, or the reverse, leading to unexpected tax results.

Index changes and fund restructures can also create surprises. ETF mergers, ticker changes, or index reconstitutions may result in two funds becoming identical—or ceasing to be distinct—during a superficial-loss window, even if they were previously considered separate.

TLH may be inefficient for small positions, where commissions, spreads, and record-keeping complexity outweigh the potential tax benefit. Similarly, frequent trading or short-term selling can complicate ACB tracking and increase the risk of reporting errors.

Finally, mutual fund year-end distributions can generate capital gains even when fund prices decline. Harvesting losses without accounting for these distributions may reduce or eliminate the expected tax benefit.

Case Studies

1. New Investor with Canadian ETFs

An investor built a non-registered portfolio using a broad Canadian equity ETF and purchased VCN near a market peak. After a market pullback, the holding traded below its ACB. The investor confirmed the loss using pooled ACB records, sold the ETF in the taxable account, and purchased a similar but not identical Canadian equity ETF to maintain exposure. The realized loss was applied against capital gains generated earlier in the year, reducing the net taxable gain while keeping the portfolio aligned with a long-term index approach.

2. Investor with Large U.S. Equity Exposure

Another investor held VUN in a taxable account and saw the position decline in CAD terms, partly due to market movement and partly due to foreign exchange changes. Before harvesting the loss, the investor calculated gains and losses in Canadian dollars, confirming the position still reflected a true capital loss. The ETF was sold and replaced with a different U.S. equity ETF tracking a separate index, allowing exposure to continue while the loss became available for tax purposes.

3. High-Income Investor with Significant 2025 Gains

A high-income investor realized substantial capital gains in 2025 following asset sales. To reduce the taxable portion of those gains, the investor reviewed underperforming positions in a non-registered account and harvested losses where appropriate. Because the 50% inclusion rate applies to net gains, the harvested losses reduced the amount of income subject to tax in a year with elevated marginal rates.

4. Spousal and Registered-Account Pitfall

In one scenario, an investor sold an ETF at a loss in a taxable account, but the same ETF was purchased in a spouse’s TFSA within the 30-day window. The loss was deemed superficial and denied, then added to the ACB of the TFSA holding. The issue could have been avoided by coordinating purchases across accounts or selecting a non-identical replacement ETF during the restricted period.

Putting Tax Loss Harvesting Into Practice

Tax loss harvesting is a valuable tool for Canadian investors with taxable portfolios, offering a way to offset capital gains and improve after-tax returns without abandoning long-term investment strategies. When executed correctly, TLH can reduce current-year taxes, create carryforward losses for future use, and support disciplined portfolio management.

However, the strategy requires careful attention to rules, including the superficial loss rule, ACB tracking, settlement timing, and account coordination. Missteps can result in denied losses or unintended tax consequences.

To implement TLH effectively:

• Review non-registered holdings regularly for unrealized losses.
• Maintain accurate ACB records using dedicated tracking tools.
• Understand and respect the 61-day superficial loss window.
• Choose replacement securities that are similar but not identical to maintain market exposure.
• Plan December trades carefully to ensure settlement falls within the intended tax year.
• Coordinate activity across personal, spousal, corporate, and registered accounts.

By integrating tax loss harvesting into an annual review process, investors can turn market volatility into a tax-planning opportunity while staying aligned with their broader financial goals. Always consult with a tax professional for personalized guidance based on your specific situation.