Capital Losses in Canada: How to Use Them to Offset Gains

Losing money on an investment stings — but in Canada, capital losses are not a dead end. The tax system lets you use them strategically to reduce or eliminate capital gains tax, potentially saving you a meaningful amount. The key is knowing the rules: when losses can be applied, in what direction, and which traps (like the superficial loss rule) can silently wipe out the benefit.

This guide explains how capital losses work in Canada, how to apply them against gains, and what to watch for.

What Is a Capital Loss?

A capital loss occurs when you sell (or are deemed to sell) a capital property for less than its adjusted cost base (ACB) plus any selling expenses. The formula is the mirror image of a capital gain:

Capital Loss = ACB + Outlays and Expenses − Proceeds of Disposition

Capital losses can arise on stocks, bonds, mutual funds, ETFs, cryptocurrency, rental properties, and other capital property. They do not arise on personal-use property (furniture, cars, personal items) or on assets used primarily for personal enjoyment — those losses are generally not deductible.

How Capital Losses Reduce Your Tax Bill

The CRA applies the same inclusion rate to capital losses as to capital gains. This means:

1. Your capital losses and capital gains in a year are netted against each other at the gross level.
2. The net figure is then multiplied by the inclusion rate to determine how much affects your taxable income.

In practice, if you have $20,000 in capital gains and $8,000 in capital losses in the same year, your net capital gain is $12,000. The inclusion-rate portion of that $12,000 is what gets added to your income. You never add the full $12,000.

If your losses exceed your gains in a year, you have a net capital loss. That loss cannot offset other types of income (employment, rental, business) in the current year — but you can move it in time.

The Three Ways to Use a Net Capital Loss

1. Current-Year Offset

Capital losses first reduce capital gains in the same tax year. This happens automatically when you calculate your net capital gain or loss on your return.

2. Carry Back Up to Three Years

If you have more losses than gains this year, you can apply the net capital loss against taxable capital gains in any of the three prior years. This triggers a refund: you file a T1A form to request the adjustment, and the CRA recalculates your tax for the earlier year. This can be a valuable tool if you had a particularly large gain in a prior year and now have losses to match against it.

3. Carry Forward Indefinitely

Net capital losses that you do not use (or choose not to carry back) can be carried forward indefinitely to offset future capital gains. There is no time limit. These carryforward losses are sometimes called "banked" losses, and many Canadians accumulate them over years of investing.

Note: there is a technical nuance when carrying losses forward or backward across years where the inclusion rate was different. An adjustment factor applies to ensure the carried loss offsets the same proportion of a gain as it would have in the year it arose. An accountant can walk you through this calculation.

When Losses Cannot Offset Business Income

This is a common misconception. Capital losses can only offset capital gains. They cannot reduce employment income, business income, rental income, or any other type of income. If you want a deduction against those income sources, you need losses that are themselves classified as business losses — a separate category entirely.

"Tax-Loss Harvesting" Before Year-End

Many investors deliberately sell underperforming investments before December 31 to crystallise losses they can use against gains realised earlier in the year. This strategy is called tax-loss harvesting. It is a legitimate and widely used planning technique — but you need to watch the calendar. The settlement date for publicly traded securities matters, not the trade date. Confirm the settlement timeline with your broker before year-end.

The Superficial Loss Rule: The Trap to Avoid

If you sell an investment at a loss and then reacquire the same or an identical property within 30 days before or after the sale (and still hold it at the end of that window), the CRA disallows the loss under the superficial loss rule. The denied loss is added to the ACB of the repurchased property — deferred, not permanently lost — but you cannot use it in the current year.

This rule prevents investors from selling purely to generate a tax loss and immediately buying back in. It catches many investors who do not realise the 30-day window extends in both directions. We cover the superficial loss rule in detail in a separate article.

Losses on Death and on Leaving Canada

When a taxpayer dies, their estate can carry back the terminal year's net capital loss against the prior year's taxable capital gains. There are also specific rules for capital losses that arise on deemed dispositions when a person ceases to be a Canadian resident. These situations are complex and require professional advice.

Frequently asked questions