Tax Loss Harvesting – A Complete Guide by a Montreal CPA Firm Near You

Introduction

Tax loss harvesting is one of the most effective strategies for reducing capital gains taxes in Canada. By intentionally selling investments at a loss, taxpayers can offset capital gains, reduce taxable income, and improve long-term after-tax returns. Yet many investors misunderstand how the rules work and unintentionally trigger CRA penalties, superficial loss denials, or missed opportunities. Whether you invest in stocks, ETFs, crypto, real estate, or managed accounts, proper tax loss harvesting can save thousands—but only if applied correctly. This guide explains the rules, the risks, and how to implement the strategy like a CPA.

Legal and Regulatory Framework

Tax loss harvesting is governed by the Income Tax Act, particularly rules relating to capital gains, allowable capital losses, and the superficial loss rule. Investors may apply net capital losses against capital gains in the current year or carry them back three years or forward indefinitely. Losses realized in tax-sheltered accounts such as TFSAs and RRSPs cannot be used for tax purposes. CRA audits capital loss claims closely, especially where superficial losses or related-party transactions appear inconsistent.

Key Court Decisions

In Bolduc v. Canada, CRA denied losses because the taxpayer repurchased identical securities within the superficial loss window. In Verrier v. Canada, the court ruled that related-party transactions could trigger superficial loss rules even without intentional tax avoidance. In Douglas v. Canada, CRA invalidated crypto capital losses due to poor documentation. These cases illustrate the importance of proper timing, documentation, and adherence to CRA rules.

How Tax Loss Harvesting Works

Tax loss harvesting involves selling investments that have declined in value to realize a capital loss. This loss can offset taxable capital gains realized in the same year. Since only 50% of capital gains are taxable, tax loss harvesting directly reduces your taxable income. If total losses exceed current-year gains, unused losses can carry forward indefinitely to offset future gains or be applied to gains from the previous three years.

The Superficial Loss Rule

The superficial loss rule is the biggest risk in tax loss harvesting. A loss is denied if:

• You sell a security at a loss,

• You or an affiliated person (spouse, corporation, trust) buys the same or identical property,

• Within 30 days before or after the sale,

• And you still own the security at the end of the period.
  If triggered, CRA denies the loss and adds it back to the adjusted cost base (ACB). Identical property includes: the same stock, identical ETF, identical mutual fund, or crypto tokens with the same characteristics. This rule applies across all accounts—taxable, TFSA, RRSP, corporate, and spousal.

Alternatives to Avoid Superficial Losses

To avoid superficial loss issues, consider:

• Buying a similar but not identical ETF (e.g., switching from XIU to XIC)

• Increasing exposure through sector ETFs instead of identical holdings

• Waiting the full 30+ days before repurchasing

• Using different securities that track similar markets

• Ensuring spouses or corporations do not repurchase the same security
  Effective substitution is key to maintaining market exposure while securing the tax loss.

Tax Loss Harvesting for Crypto

Crypto is also eligible for tax loss harvesting. CRA treats crypto as a commodity, meaning every swap, sale, or exchange is a taxable event. However, superficial loss rules still apply to crypto if an identical token is repurchased within 30 days. Crypto investors must maintain detailed transaction histories, wallet logs, and fair-market-value records to defend capital loss claims.

Real Estate and Tax Loss Harvesting

Losses from personal residences cannot be claimed. However, rental real estate may generate capital losses when sold—these can offset other capital gains. Taxpayers must ensure proper ACB calculations, including renovations, selling costs, and depreciation recapture.

Common Mistakes Investors Make

Investors frequently: repurchase too soon and trigger superficial loss denial, fail to coordinate trades across spouse or corporate accounts, misunderstand “identical property” rules, forget to track ACB changes, harvest losses inside TFSAs (non-deductible), fail to document crypto valuations, or forget to apply losses against prior gains. These errors reduce tax benefits and increase CRA audit risk.

When to Use Tax Loss Harvesting

Tax loss harvesting is most effective when: selling appreciated assets, rebalancing a portfolio, crystallizing gains for estate planning, offsetting large real estate or business sale gains, donating securities, or preparing for year-end tax optimization. It is especially valuable in volatile markets where gains and losses fluctuate widely.

Mackisen Strategy

At Mackisen CPA Montreal, we help clients implement tax loss harvesting strategically. We calculate capital gains/losses, analyze ACB records, avoid superficial losses, coordinate trades across spouses and corporations, integrate harvesting into year-end planning, and build long-term tax-efficient investment strategies. Our forensic documentation processes ensure CRA-proof capital loss reporting.

Real Client Experience

A Montreal investor avoided AMT and reduced tax by $22,000 after we harvested losses during market volatility. A crypto investor prevented CRA denial by reconstructing thousands of blockchain transactions. A family trust avoided superficial loss issues after our restructuring plan coordinated trades across all related accounts. A retiree offset large capital gains from a cottage sale through strategic tax loss harvesting.

Common Questions

Can I harvest losses in a TFSA or RRSP? No—losses in registered accounts are not deductible. Can I repurchase a similar ETF? Yes—just not identical. Can crypto losses be denied? Yes—superficial loss rules apply. Should I harvest losses every year? Only when strategically beneficial.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal ensures every tax loss harvesting strategy is accurate, compliant, and optimized. We help investors reduce tax, avoid CRA denial, and maximize long-term wealth with professional planning.