What is tax loss harvesting and how can it benefit your portfolio?
Tax harvesting is the practice of selling investments at a loss to offset capital gains taxes. Capital gains losses are not incurred in registered accounts (TFSAs, RRSPs), so tax loss harvesting is only applicable for non-registered accounts. The capital losses can be used to reduce capital gains in the current year, the three preceding years, or any future year. While it may seem counterintuitive to sell an investment that is losing money, tax harvesting can effectively minimize your tax bill and improve your overall returns.
CRA superficial rules
There are limitations to how tax loss harvesting can be used. Specifically, the CRA superficial loss rules are designed to prevent taxpayers from claiming a loss on the disposition of property where there has been no change in the underlying economic ownership of the property. If you do not follow the proper guidelines, then the superficial loss rules may cause you to end up in trouble with CRA or lose your tax savings opportunity. For instance, after selling at a loss, you cannot immediately invest in the same funds at a lower price. CRA’s superficial rules would preclude this repurchase of the same investment for at least 30 days.
Example of tax loss harvesting example
January 2020 — Invested $50,000 in a non-registered account titled “Fund A”
May 2022 — Value of Fund A dropped to $35,000
May 2022 — You decided to sell Fund A and reinvested the $35,000 in a comparable non-registered account titled “Fund B,” a similar fund to Fund A.
By selling Fund A, you can recognize the capital loss of $15,000 and may expect similar returns over the long term from your new investment with Fund B.
Benefits of tax loss harvesting
- It allows investors to be strategic with their tax savings
- It allows investors to make, rebalance, and improve their asset allocation
- It allows investors to minimize the negative impact of the losses on their portfolio
If you have realized losses in your investments, it may be a good time to harvest those losses. Tax loss harvesting can help reduce your taxable income and save money on your tax bill. This year, speak with your financial professional to see if tax loss harvesting is the right move for you.
