Let’s be real: the stock market is moody. One minute it’s soaring, the next it’s taking a nosedive. As a business owner with corporate investments, you know that rollercoaster feeling all too well. But what if you could actually use those market dips to your advantage? What if a down market could lead to a real win for your company’s bottom line?
It might sound a little too good to be true, but it’s a totally legitimate and incredibly savvy strategy, especially at year-end. It’s called tax-loss harvesting, and it’s one of the most powerful tools you have in your financial arsenal.
Let’s unpack how it works.
First, What Are Capital Gains and Losses Anyway?
Before we jump into the deep end, we need to get on the same page with two simple ideas.
- Capital Gain: You snag a stock for $1,000. It skyrockets, and you sell it for $1,500. That sweet $500 profit? That’s your capital gain.
- Capital Loss: You buy another stock for $1,000. This time, the market sours, and you sell it for $700. The $300 hit you took is your capital loss.
Here’s the good part. In Canada, you’re only taxed on half of your gains. This is called the taxable capital gain. So, on that $500 profit, your corporation only pays tax on $250. The same goes for losses. Your $300 loss creates a $150 allowable capital loss—and that’s what you can use to your advantage.
So, What Exactly is Tax-Loss Harvesting?
Honestly, the name pretty much says it all.
Tax-loss harvesting is when you strategically decide to sell investments that are currently in the red. You’re doing it on purpose to “realize” that loss on paper. Why would you ever want to lock in a loss? Because that loss becomes an asset. You can use these allowable capital losses to wipe out the taxable capital gains from your winning investments.
The end result? A much smaller tax bill for your corporation. It’s that simple.
This isn’t about ditching an investment you believe in forever. It’s about making a calculated financial move to optimize your taxes right now.
The Nitty-Gritty: How It Works
Let’s walk through the steps. It’s probably more straightforward than you think.
- Scan Your Portfolio: First, take a good look through your corporation’s non-registered investment accounts. Your mission is to find any stocks, mutual funds, or ETFs that are currently worth less than you paid for them.
- Sell to Realize the Loss: By selling that underperforming asset, you make the capital loss official. Until you hit ‘sell’, it’s just an unrealized “paper loss” that has zero effect on your taxes.
- Offset Your Gains: Now for the magic. You take those losses and apply them against any capital gains you’ve cashed in on this year. Let’s say you have $10,000 in taxable capital gains, but you harvest $8,000 in allowable capital losses. Suddenly, you only have to pay tax on $2,000 of gains. That’s a massive difference.
- Carry Losses Back or Forward: What if your losses are bigger than your gains this year? No sweat. The Canada Revenue Agency (CRA) is surprisingly flexible here. Your corporation can carry those extra losses back up to three years to get a refund on taxes you’ve already paid. Or, you can carry them forward indefinitely to shield future capital gains from tax.
Watch Out: The Superficial Loss Rule
Okay, there’s one big rule you absolutely must know. It’s called the superficial loss rule.
The government isn’t silly. They figured out that people might try to sell a stock to get the tax break and then immediately buy it right back. To stop this, the CRA created a rule: you can’t claim the capital loss if you or an affiliated person (like another company you control) buys the exact same property back within a 61-day window. That’s 30 days before you sell and 30 days after.
If you break this rule, your capital loss is denied. Poof. It vanishes.
So, if you want to get back into a similar investment, you have two choices: wait at least 31 days, or buy something similar but not identical. For instance, you could sell an ETF from one company that tracks the S&P/TSX Composite Index and buy a similar ETF tracking the same index from a different company.
Why This is a Game-Changer for Your Corporation
At the end of the day, tax-loss harvesting is all about being tax-efficient. Every single dollar you save on taxes is a dollar that stays in your corporation. Think about it. That’s more money you can use to fuel growth, hire amazing people, pay down debt, or innovate.
It’s a strategy that turns a portfolio’s weak spots into a powerful financial advantage, putting you back in the driver’s seat of your company’s financial health. This is what proactive financial management looks like.
But while the concept is simple, putting it into practice—especially when navigating things like the superficial loss rule and deciding which assets to sell—can get tricky. Every company’s situation is unique, and a wrong move could cost you.
That’s why getting a second set of eyes on your plan is always a smart move. To make sure you’re getting the most out of this strategy and staying on the right side of the CRA, talking to a professional can make all the difference. For personalized advice on your corporate tax strategy, we recommend you get in touch with an expert who can guide you through the process.