An effective strategy for investors amidst the recent market volatility is realizing losses on securities to offset capital gains in an investment portfolio. A tax loss harvesting strategy can be implemented without changing the long-term financial goals for an investor. These strategies apply only to non-registered accounts.
What is ‘tax loss harvesting’?
Tax loss harvesting is a method in which an investor incurs losses by choosing to sell securities that currently have a fair market value that is lower than its cost base. These losses will then allow the investor to offset capital gains realized on other investments in the portfolio, ultimately lowering the tax payable in the year.1 Investors must be aware of superficial loss rules – when an investment is sold at a loss, and an identical investment is purchased either 30 days before or after the loss was realized, Canadian tax laws will deny the loss.
To ensure that the superficial loss rules don’t affect the long-term financial goals of the investor, the individual has the option to add a similar but not identical investment in their portfolio. For example, an ETF can be purchased with the same industry exposure as another ETF (tracking a different index), a mutual fund or other security that was sold to utilize its losses.