Tax-Loss Harvesting

Losses are worth money

Tax-loss harvesting is the deliberate version of something investors usually do by accident: selling at a loss. In a non-registered account, a realized capital loss is a tax asset. It offsets realized capital gains dollar for dollar and reduces the capital gains tax you owe. The strategy is simply to collect that asset on purpose when the market hands it to you, without actually leaving the market.

The mechanics: a capital loss must first offset capital gains realized in the same year. Any net loss left over can be carried back up to three years, by filing form T1A so the CRA reassesses a past return and refunds tax you already paid, or carried forward indefinitely against future gains. What a capital loss cannot do is reduce ordinary income like salary or interest (special rules in the year of death aside).

None of this exists inside a TFSA or RRSP: losses in registered accounts have no tax value, which is why harvesting is strictly a non-registered-account strategy.

The superficial loss rule sets the rules of the game

Everything about harvesting is shaped by the superficial loss rule. Sell at a loss and let the identical property be bought within 30 days before or after the sale, whether by you, your spouse, or a registered account belonging to either of you, and the loss is denied. If the repurchase happens inside a TFSA or RRSP, the loss is not merely deferred but destroyed for good.

The full mechanics, the 61-day window, the affiliated-person list and the DRIP trap, are covered in that article. For harvesting purposes the takeaway is short: for 30 days on either side of the sale, nobody in your tax orbit buys the same security.

Staying invested: the pairing approach

The naive move is to sell, sit in cash for 31 days, and rebuy. That risks missing a rebound, and rebounds have a habit of arriving during exactly such windows. The standard solution is to swap into a similar but not identical fund for the waiting period: sell your equity ETF that tracks one index and immediately buy a different provider's fund tracking a different index of the same market. Your exposure barely changes, but the two funds are not identical property, so the loss stands.

Experienced harvesters pre-select pairs of funds they are equally happy to own and simply alternate between them. If you prefer to switch back to the original after the 31 days, you can, though every extra trade adds cost and bookkeeping.

Year-end timing: settlement, not trade date

A loss counts in the year the trade settles, not the day you click sell. Canadian and US markets settle one business day after the trade (T+1, as of July 2026), so a sale on the very last trading day of December settles in January and lands in the wrong tax year. Check each December's published deadline, and give yourself a margin rather than trading on the final eligible day.

When it is worth doing, and when it is not

Harvesting is a tool, not a reflex. It earns its keep when:

• You have gains to offset. You realized capital gains this year, or paid capital gains tax in any of the three previous years that a T1A carryback could recover.
• Your tax rate is high now. If your marginal tax rate is higher today than it will be when you eventually sell, the loss saves tax at a better rate than the future gain will cost.
• The embedded loss is large. A big paper loss on a position you can cleanly swap is the ideal case.
• Skip it when the loss is small. Trading costs, bid-ask spreads and the tracking hassle can eat the benefit of harvesting a few hundred dollars of loss.
• Skip it when it bends your portfolio. If the swap drifts your asset allocation, or the replacement is a fund you do not actually want, the tax tail is wagging the dog.

The honest math: deferral plus rate arbitrage

Harvesting resets your adjusted cost base to the new, lower purchase price. When you eventually sell, your gain is bigger by exactly the loss you harvested. In the base case you have not eliminated tax, you have deferred it: cash saved today, a matching tax bill later.

That is still valuable. The deferred tax compounds in your account instead of the government's, the carryback can recover tax already paid, and if your rate is lower in the year you finally sell, in retirement for example, the arbitrage is real. But if your rate will be higher later, harvesting can cost money on net. Treat it as deferral plus a bet on rates, not free money.