Tax-loss harvesting

Tax-loss harvesting is the practice of deliberately realizing a paper loss in a non-registered account to reduce the investor's taxable capital gains for the year. The loss offsets gains dollar-for-dollar (after the inclusion rate); any unused loss carries back up to three years or forward indefinitely.

Mechanically it only changes tax timing, not tax amount. The sale drops the position's adjusted cost base on the next purchase — so if the investor buys back in at the lower price, a future gain on the rebound is larger by exactly the loss amount. The benefit is the time value of deferring tax, which can be substantial when the deferral is long.

The mechanics are only meaningful in a non-registered account. Inside a TFSA, RRSP, FHSA, or RESP there are no taxable gains to offset, so harvesting a loss does nothing except lower the adjusted cost base for a repurchase — often worse than doing nothing.