Capital losses, tax loss harvesting, and the superficial loss rules

Making effective use of capital losses

Just as an appreciation in price can lead to a capital gain, a decrease in price can result in a capital loss. In an investment portfolio, capital gains and losses may apply to individual securities or to pooled securities like mutual funds. For the purposes of this article, we’ll use the term “security” as a short form reference to both.

As with capital gains, capital losses are unrealized until there is a taxable event. Half of the capital loss, known as the allowable capital loss, can be applied to offset the taxable half of capital gains.

Applying capital losses

Capital losses realized in a year must first be used against capital gains that same year, with the investor then having discretion to apply any unused excess against capital gains in any of the three preceding tax years, or to carry those losses forward for future use.

For an investor who realized and reported capital gains in 2023, then 2026 is the last year from which capital losses may be carried back to amend/re-file that earlier tax return to recover the tax paid on those past capital gains.

Verifying and using your capital loss carryover

If you anticipate realizing on capital gains in the current year and have unused capital losses from past years, you may make use of that loss carryover now. You can find your carryover balance on your latest Notice of Assessment, or by logging into your My Account on the Canada Revenue Agency website, and viewing “Carryover amounts” under the “Tax returns” tab.

Candidate securities for ‘tax loss harvesting’

Look at your current non-registered account holdings to see if you have any securities in a loss position. You can sell a portion of those to realize sufficient capital losses to offset some or all of the capital gains in the current year, with the option to carry any excess back to any of the three preceding years. Depending on investor circumstances, a capital gain may be anticipated in a near future year, in which case there is the option to trigger a current loss to be applied against the future capital gain (assuming it comes about) in that later year.

To be clear, the tax impact contributes into your decision, but should not dictate your portfolio actions.

It may be the case that the currently-held securities still fit an investor’s longer term portfolio goals despite being in a loss position at present. After the securities are sold, the investor may be concerned about missing out on a price recovery of those disposed securities, which may make it may be tempting to immediately re-establish the position after triggering a capital loss. However, if the investor acts too quickly, there is a risk of being caught by the superficial loss rules in the Income Tax Act (ITA).

Superficial loss rules

These rules apply if the same security is purchased in the 30 days before or 30 days after the loss transaction. This extends beyond the investor personally to affiliated persons, including a spouse and registered plans belonging to either of them, such as a RRSP, RRIF, TFSA, RESP or RDSP. It may also apply to corporations or trusts of which either is a significant shareholder or beneficiary, respectively.

The mechanics of the rule is that the capital loss is denied on the sale transaction, but an equivalent amount is added to the adjusted cost base (ACB) of the new holding on the purchase side. Thus, the capital loss is embedded into the new holding and remains available for the holder to use in future, but cannot be used against capital gains arising presently.

An important exception to the application of the ACB addition on the purchase transaction is where a registered account is involved. The first half of the superficial loss mechanics will still apply to deny the capital loss, but there will be no corresponding addition to the ACB in the registered account. The capital loss is effectively permanently lost. This is true whether there are two distinct transactions, or where there is an in-kind transfer of securities from a non-registered account into a registered account.

Importing losses of a spouse

There is a way to use the superficial loss rules to strategically transfer a loss from one spouse to the other. Let’s say you have capital gains, while your spouse has unrelated securities in a loss position.

    • Your spouse sells and realizes a capital loss, and you purchase the same security in the +30/-30 day window.
    • Your ACB will be higher than your purchase price by the amount of the added loss denied to your spouse.
    • After waiting at least 30 days following your spouse’s settlement date (which is 2 days after the transaction date), you can sell to realize your loss, and use it against current capital gains in the usual manner.

Of course, the price of your new securities could rise during your holding period, reducing your expected loss. But that means you receive more money when you sell, so there’s not much to complain about under that scenario.

Settling transactions before year-end

The relevant date for capital gain or capital loss recognition is the settlement date. In 1995, the settlement day was reduced from five days to three days following the trade date. It was reduced to two days in 2017, and as of May 27, 2024, Canada moved to one-day settlement, or T+1.

The last trade date for settlement before year-end is Wednesday December 30, 2026. HOWEVER, check with your financial institution on its operational processing cutoff date, as it may need extended time to handle the potentially high volume of year-end transactions, which could require instructions to be received by mid-December or earlier

‘No charge’ for mom – Are you insure about that?

The economics of a mom’s love

There’s an old country song “No charge”, made famous in Canada in the 1970s when Tommy Hunter recited it on an episode of his CBC TV show.

While a mother is preparing the family dinner, her young son comes to her with a piece of paper. On it is a list of chores and charges, and a tally: $14.75. She pauses, wipes her hands on her apron and takes up a pen. She turns the paper over and lists all the acts of motherly love from childbirth to sleepless nights and kissing bruises, writing “no charge” next to each.

Well, with tears in his eyes, the son looks up and says, “Mama, I sure do love you.” Then he takes back the page, and in big letters writes, “PAID IN FULL.”

Identifying and measuring unpaid work

It’s a blatant pull at your heart strings – as a good country song is wont to do – but at the same time, there is truth in those words.

Time spent on unpaid household/family activity

Every few years Statistics Canada publishes a series of research papers on Women in Canada.[1] From its 2018 report, here are some key observations on the economic well-being of women:

    • Women are more likely than men to participate in housework activities, and they spend more time doing so.
    • Both mothers and fathers spend more time on childcare than thirty years ago, but women have increased their time with children to a greater extent than men.
    • A greater proportion of women than men perform routine childcare tasks on a given day, and spend more time doing so.
    • Women are overrepresented as caregivers to adult family members or friends, particularly when the care recipient has a long-term health condition or a physical or mental disability.

This is a big picture view of the relative amount of time spent by men and women, and how it has changed over the years – and in some ways how it hasn’t. Apart from the time aspect, can we put a dollar value on this?

What if mom was on a salary?

Each year around Mother’s Day, the website salary.com publishes an estimate of what a mom would earn if paid in the open market. While acknowledging that it cannot assign a value to all features of parenthood, the site draws from about three dozen job categories to represent the core competencies of motherhood. Its most recent estimate of median annual salary for a stay-at-home mom is US$184,820. And as if it’s necessary to point out, the figure is even more compelling when converted to Canadian dollars.

Of course, this is mainly a promotional exercise for the website and its services, but it helps illustrate the wide breadth of a mother’s contribution to the family, on top of it being unpaid.

The paid work picture

The Statistics Canada research notes that, “historically, women’s financial security has been closely tied to their familial relationships with men.” This is looking back from the mid 20th century, referring to a woman’s father while she was growing up, then her spouse/common-law partner as she moved into adulthood.

Progress over the decades

Labour force participation of women increased from the 1960’s, at the same time as women were gaining more access and control over household resources. Since then, women’s economic well-being has evolved dramatically, again as compiled by Statistics Canada:

    • Women’s average personal income more than doubled in constant dollar terms from 1976 to 2015, with the gender disparity in income being cut in half over that 40-year stretch.
    • Women’s earnings make up a larger share of family income than ever before. In families with a working woman in the core working ages of 25 to 54, the woman contributed 47% to the family’s income in 2015.
    • Women’s workforce participation has enhanced the security of couple families. These families are more resilient to the rising cost of living, downward wage pressure for men, and unemployment generally.
    • Dual-earner families are also better protected in recessions, with women experiencing fewer job losses due to their larger representation in non-cyclical sectors such as education, health care and government.

For her, and those around her

These trends in women’s work participation and income growth are self-evidently beneficial to affected women personally. As well, society overall is better off, both in the social sphere and in the economic benefit of the fuller participation and contribution of women. And finally, spouses and families are able to enjoy more abundant, diversified and stable financial lives.

And without mom? – The role of life and disability insurance

There is plenty that can be learned from the Statistics Canada research and other sources about the state of women in our society. It can and should motivate individual and collective action toward greater gender equality.

For current purposes though, let’s look at what this means at the individual or family level. In particular, what economic hardship will befall a family if mom dies or becomes disabled, and where does insurance fit in?

Loss of income source

While life and disability insurance have many uses, their primary purpose is to replace lost household income. The positive progress in women’s employment and income over the decades provides both direct and indirect evidence of why and how much harm may be inflicted if tragedy hits. There’s double damage in the case of disability due to additional cost of care, and of course it’s especially devastating for a single mother family.

The obvious direct impact is the actual income that is no longer coming in. The less obvious part in the case of a dual-earner family is the loss of stability and diversification. Though it may not be easily quantifiable, it would be helpful for a couple to anticipate how the death or disability of one of them could affect the practical and financial viability of the survivor’s continuing occupation.

Loss of that unpaid labour

This brings us back to all that time mom spends on unpaid household/family activity. In mom’s absence, some of those tasks may be replaced by bought services, but money is no proxy for a parent’s presence, love, affection and attention. To continue to fulfill that role, dad may need to change his work routine, and possibly even make some broader career adjustments.

In this respect, in addition to replacing mom’s lost income, insurance can also stand in for the reduced income dad may experience due to increased caregiving demands. Whether this is a temporary measure or a permanent new normal, the family is given the time to grieve, heal and look to the future in financial security and comfort.

—————

[1] Women in Canada: A Gender-based Statistical Report
https://www150.statcan.gc.ca/n1/pub/89-503-x/89-503-x2015001-eng.htm

Twelve things to do with your 2025 tax refund

Spending and saving in helpful harmony

Other than those who work in the tax business, no-one looks forward to preparing an income tax return – that is, unless you’re expecting a refund!

If you’re keen and prepared, you can file your income tax return once the Canada Revenue Agency (CRA) releases the personal income tax package, scheduled this year to be Tuesday, January 20, 2026. Otherwise, the deadline to file without facing a late penalty is midnight on Thursday, April 30, 2026.

Whatever date you can get yours in, it’s a good idea to register for your CRA “My Account” and sign up for direct deposit. According to the agency’s website, you can receive your refund in as little as eight business days.

Back to the refund itself, you may have visions of champagne and caviar dancing in your head, but here are some tax-motivated suggestions to complement those thoughts, before it’s all spent.

1.    Your RRSP

As your first priority, consider contributing a portion into your registered retirement savings plan (RRSP). It can get your savings routine going early in the year, helping to generate another refund next year. Available contribution room includes carryover of previously unused room plus 18% of the preceding year’s earned income, up to the annually-indexed maximum prescribed by regulation. For 2026, that prescribed maximum is $33,810, reached at 2025 earned income of $187,833.

Even so, it’s important to understand that the reason many people get a refund is because their employer was not aware of RRSP contributions made outside the workplace. Too much tax may have been withheld on payroll than required, so really you’re getting back the money you loaned interest-free to the government over the year.

So, rather than waiting another 12 months before you get that next refund, you may wish to file CRA Form T-1213 with your employer to reduce the withholding tax on your payroll deposits. You’ll increase your current cash flow, rather than waiting to get it in a lump sum next year.

2.    Spousal RRSP

You can use your contribution room for your own RRSP or to put it toward a spousal RRSP. This sets the stage for income splitting between the two of you, as you get a deduction at your tax bracket now, and your spouse withdraws at an expected lower bracket later.

Understanding that the primary purpose is to assist with retirement income, that withdrawal does not have to wait until any particular age. Even so, don’t be too hasty: Withdrawals taken in the contribution year or in the two calendar years afterward will be taxed to the contributor spouse.

3.    RRSP loan paydown

An RRSP loan can give a boost to your RRSP if you don’t have money available as you near the contribution deadline at the 60thday of the year following the calendar year for which you intend to claim the deduction. Bear in mind though that interest on such loans is not tax-deductible, and neither is the repayment of the loan principal.

It’s a good idea to use the refund generated from the contribution to pay down the bulk of the loan initially, then pay off the rest over the coming months. Once the loan is paid off, you could continue that cash flow routine, but now contributing directly into your RRSP to get ahead on this year’s contributions – and next year’s refund.

4.    FHSA for first-home financing *Still new-ish*

Since 2023, qualified individuals who do not currently own the property where they live have been eligible to contribute up to $8,000 annually (up to $40,000 lifetime) to a first home savings account (FHSA) to help with the down payment on a home. FHSA contributions are tax-deductible, accumulation is tax-sheltered, and withdrawals are tax-free when applied toward a first home purchase.

5.    Mortgage reduction

A home purchase is likely the largest single financial event of your life, usually accompanied by a mortgage that will take years or decades to pay off. An annual top-up from your tax refund is a simple and effective strategy to get you mortgage-free sooner. Those extra payments can reduce both the time to retire that loan and the interest you pay, giving you more flexibility and control of your finances along the way. And remember, both the interest and principal repayment are in after-tax dollars, which is another way of saying they are non-deductible – and that brings us to …

6.    Paying down discretionary non-deductible debt

There can be many points in life when available resources aren’t sufficient for current needs. That’s when the prudent use of credit can help you bridge the time until you have surplus money to work with. Still, you have to keep an eye on your debt, as it can easily compound against you faster than you can build savings if you’re not careful. It helps to have a plan and commitment to eliminate debt as soon as manageable, to keep your finances on track.

7.    TFSA for flexible savings

The tax-free savings account (TFSA) was introduced 2009, complementing the RRSP program that has been around for more than half a century. TFSAs allow after-tax investment dollars to grow tax-sheltered and to be withdrawn tax-free. Each Canadian resident over age 18 is entitled to $7,000 of TFSA annual room in 2026, and for someone who was over 18 when it began in 2009 (but hasn’t used it), the carryforward room is $109,000.

8.    Life insurance for tax-smart family protection

Parents generally appreciate the value of life insurance, but may stall in putting it in place, being unsure where they’ll find the cash for the initial premium. A tax refund can be an ideal starter for systematically saving for and servicing that insurance, without disrupting the household budget. Once over that first hurdle, it becomes increasingly easier to sustain the routine. And if payment does come about, the insurance proceeds are tax-free.

9.    RESP for education

Post-secondary education costs continue to rise at staggering rates. That’s why it’s so important to save early and save smartly for a child’s education – which is where the registered education savings plan (RESP) comes in. Your tax refund can start or sustain an RESP. Coupled with generous government matching grants of up to $1,000 a year, all invested dollars grow tax-sheltered, with the earnings taxed to the student when eventually withdrawn for education needs.

10. RDSP for disability needs

Significant government support and tax benefits are available through the registered disability savings plan (RDSP) for families with disability needs. Government matching grants can be as much as 300% of personal contributions, making this a prime place to consider for tax refund money. Depending on household income, up to $3,500 in grants may be received in a year. Be sure, however, to coordinate the RDSP within an overarching life program, of which financial management is of course a key component.

11. Non-registered investments

Though we tend to think first of saving in the tax-sheltered plans mentioned earlier, there is a legal limit on how much can go into each of them. Once those options have been exhausted, you can use non-registered accounts that don’t have such limits. And depending on your age and stage in life, it can make sense to complement or supplement current savings with non-registered investments even sooner.

12. Live it up … a bit

After all, saving is just spending-in-waiting – but try to keep it in balance.