Tax-Loss Harvesting in Ontario: What It Is and When It Makes Sense

If you hold investments in a non-registered account in Ontario and have ever sold something at a loss, you may have already done a version of tax-loss harvesting — perhaps without knowing it had a name. When used deliberately, it's one of the more straightforward strategies for reducing your tax bill without changing your investment exposure in any meaningful way.

What Is Tax-Loss Harvesting?

Tax-loss harvesting is the practice of selling an investment that has declined in value below its adjusted cost base (ACB) to realize a capital loss, which can then be used to offset capital gains elsewhere in your portfolio or carried to other tax years.

In Canada, capital losses can be applied as follows:

• Against capital gains in the same tax year (the most common use)
• Carried back three years to offset capital gains you paid tax on previously
• Carried forward indefinitely to offset future capital gains

The key is that losses can only offset capital gains — they cannot reduce other types of income like employment income, business income, or interest. If you have no capital gains in any relevant year, the losses carry forward until you do.

How It Works in Practice

Suppose you hold two stocks in your non-registered account. Stock A has risen significantly and you want to sell it, triggering a $20,000 capital gain. Under current Canadian tax rules, 50% of that gain — $10,000 — would be included in your taxable income. (Note: the capital gains inclusion rate has been subject to legislative discussion; confirm the current rate with a tax professional.)

Stock B, on the other hand, has dropped in value and now sits at a $15,000 loss relative to what you paid. If you sell Stock B before year-end, you realize that $15,000 capital loss, which can be applied against your $20,000 capital gain — leaving only $5,000 as a net gain to include in income.

The result: you've meaningfully reduced your tax exposure for the year.

The Superficial Loss Rule — What to Watch Out For

There is a critical caveat. The CRA has a superficial loss rule designed to prevent investors from selling an investment just for the tax loss and then immediately buying it back.

Under this rule, if you or an "affiliated person" (which includes your spouse or a corporation you control) buys the same or identical security within 30 calendar days before or after the sale, the capital loss is denied. The denied loss is added to the ACB of the repurchased security, deferring rather than eliminating the tax benefit.

To avoid triggering the superficial loss rule while maintaining market exposure, investors sometimes replace the sold security with a similar-but-not-identical investment. For example, selling one broad Canadian equity ETF and buying a comparable one from a different fund company. Whether two securities are considered "identical" is a matter of tax law and the specifics matter — this is worth confirming with a tax or financial professional.

When Tax-Loss Harvesting Makes Sense

This strategy is most relevant when:

• You hold investments in a non-registered account (losses inside RRSPs, TFSAs, or other registered accounts cannot be claimed)
• You have realized or anticipated capital gains in the current year or recent past years that you'd like to offset
• You're approaching year-end and have unrealized losses sitting in your portfolio
• You've received a large capital gain from a business sale, real estate disposition, or inheritance

It's less useful if you have no capital gains to offset, if your losses are inside registered accounts, or if you're in a low enough tax bracket that the capital gains inclusion has minimal impact on your overall tax.

Tax-Loss Harvesting Is a Tool, Not a Strategy

Harvesting losses is a useful tactic, but it works best as part of a broader investment tax plan — one that also considers account structure, asset location, timing of withdrawals, and long-term after-tax return optimization. Done well, it can recover meaningful dollars. Done in isolation, without considering the superficial loss rules or the broader picture, it can create problems.

Marc Pineault is a financial planner with Pineault Wealth Management in London, Ontario, working with investors across Southwestern Ontario who want their portfolio structure and tax plan to work together. If you're sitting on unrealized losses or expect a significant capital gain in the coming year, it's worth reviewing your options before year-end.

Have capital gains tax questions? Contact Pineault Wealth Management to connect with Marc and discuss your investment tax planning options.

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This article is for educational purposes only and does not constitute personalized financial advice. Please consult a qualified financial planner before making any financial decisions.