What Is It?
Tax loss harvesting — selling an investment at a loss to generate a capital loss that offsets capital gains — is a legitimate tax strategy in Canada. However, the superficial loss rule (Income Tax Act, s. 54, 40(2)(g)) disallows the capital loss if you (or an affiliated person) acquires the same or identical property during the period beginning 30 days before the sale and ending 30 days after the sale.
If the rule applies, the disallowed loss is added to the adjusted cost base (ACB) of the repurchased property — it doesn’t disappear, but it’s deferred until you ultimately dispose of the repurchased shares permanently.
The 30-Day Window
The superficial loss rule applies when:
- You sell a property at a loss
- During the period from 30 days before to 30 days after the sale date, you (or an affiliated person) acquired the same or identical property
“Acquired” includes purchases made before AND after the sale — so if you bought more shares in the 30 days before you sold at a loss, the rule can apply retroactively to that earlier sale.
Who Is an “Affiliated Person”?
Affiliated persons include:
- Your spouse or common-law partner
- A corporation controlled by you or your spouse
- A partnership in which you or your spouse is a majority interest partner
- Your RRSP, RRIF, or TFSA (for superficial loss purposes)
This is where many investors get surprised: buying the same shares in your RRSP or TFSA within 30 days of selling at a loss in your non-registered account triggers the superficial loss rule. The loss is denied and added to the RRSP/TFSA’s ACB — effectively permanently lost because RRSP/TFSA withdrawals don’t generate capital losses.
How to Legitimately Harvest Tax Losses
Strategy 1 — Wait 31 days. After selling at a loss, simply wait 31 calendar days before repurchasing. The loss is recognized; you may miss some price movement but have a clean tax loss.
Strategy 2 — Buy a similar but not identical security. Purchase a different ETF or stock that tracks the same sector or index but is not the same or identical property. For example, sell XIU (iShares S&P/TSX 60 ETF) at a loss and immediately buy ZCN (BMO S&P/TSX Capped Composite ETF) — different issuers, different underlying indices, similar exposure.
Strategy 3 — Avoid RRSP/TFSA purchases of the same security. Do not contribute to or purchase the identical security in your registered accounts within 30 days of harvesting the loss in your non-registered account.
What Most People Don’t Know
- RRSP and TFSA purchases count as affiliated person acquisitions. This catches many DIY investors. Selling a losing stock in your non-registered account and buying the same stock inside your RRSP the next week permanently destroys the capital loss.
- The disallowed loss is added to the ACB of repurchased shares. It’s not gone forever in non-registered accounts — when you eventually sell those shares, you’ll have a higher ACB and a correspondingly smaller gain or larger loss. But the tax benefit is deferred, not recovered.
- Identical property doesn’t mean identical issuer — it means identical security. Two different classes of shares of the same company can both be “identical property.” But shares of two different ETFs that track different indices are generally not identical.
- Options and rights can trigger the rule. Acquiring an option or right to acquire identical property during the 30-day window can also trigger superficial loss treatment, even if the option isn’t exercised until later.
Frequently Asked Questions
I sold shares at a loss and my employer’s DRIP plan automatically reinvested dividends into the same shares 15 days later. Is that a superficial loss?
Possibly — automatic dividend reinvestment plans (DRIPs) can trigger the superficial loss rule if the reinvestment occurs within the 30-day window. Consider suspending DRIP participation before harvesting a tax loss in that security.
I want to sell an ETF at a loss and immediately buy back in. Is there a “substantially identical” test like in the US?
Canada’s rule requires “identical property” — the same shares or units of the same fund. Switching to a different ETF that tracks a similar (but not identical) index avoids the rule. However, the two funds must be genuinely different — courts and CRA look at whether they are effectively interchangeable.
Can my spouse sell the shares I just harvested a loss on, and I buy them back?
No — your spouse is an affiliated person. If your spouse sells shares that you’ve agreed to repurchase (or vice versa), the rule still applies. Superficial loss planning through a spouse doesn’t work.
What if the superficial loss rule applies — is the loss permanently lost?
In non-registered accounts, no — the denied loss is added to the ACB of the repurchased property, effectively deferring the loss until permanent disposal. However, if the repurchased property ends up inside an RRSP or TFSA, the deferral becomes permanent because those accounts don’t generate capital losses on disposition.