Author: Jason Heath
Capital losses in a TFSA
A capital loss is when you sell an investment at a lower price than what you purchased it for originally. In a taxable non-registered account, like a cash or margin account, capital gains and capital losses have income tax implications. You report them on your tax return. In a tax-sheltered account like a registered retirement savings plan (RRSP) or a tax-free account like a tax-free savings account (TFSA), a capital loss is relevant for investment purposes, but not for tax purposes.
That means there are no tax savings if you sell an investment for a capital loss in a TFSA. Mind you, there is no tax payable for a capital gain—selling for a profit—either.
To answer the question directly, you do not get additional TFSA room if you have a capital loss. Likewise, you do not lose TFSA room if you have a capital gain. But keep reading; there’s more to know.
How does TFSA contribution room work?
TFSA room is based solely on your age, residency, deposits and withdrawals.
- Age: If you are 18 or older, you accrue TFSA room based on the TFSA limit for that year. If you were born in 1991 or earlier and have never contributed, your cumulative room would be $88,000 as of January 1, 2023.
- Residency: If you are a non-resident of Canada for the entire year, you do not accrue new TFSA room. In the year you depart Canada or return to Canada, your TFSA room for the year is not pro-rated. You are entitled to the annual maximum. But non-residents cannot contribute to a TFSA after their date of departure.
- Contributions: Contributions reduce your TFSA room immediately.
- Withdrawals: Withdrawals increase your TFSA room, but not until January 1 of the following year, when your TFSA room is adjusted.
What should you keep in a TFSA?
The potential to have a capital loss and lose out on tax-free room in your account may be one reason to avoid holding speculative stocks within a TFSA. At the same time, the possibility of a big tax-free win on a stock makes it tempting to hold these investments in the account.
When you are considering the sale of an investment for a capital gain or loss, the tax implications in a taxable account may cause you to reconsider the sale, or at least the timing or magnitude of the sale.
In a tax-free account or tax-sheltered account, tax implications have no impact on the timing of an investment sale. Investor sentiment or psychology may drive decision making, though. My advice in a non-taxable account is to ignore whether you are selling for a loss. Some investors get fixated on waiting until a stock recovers to its original purchase price so they can recoup their losses.
To the contrary, I would be inclined to consider the value of the investment.
If it is worth $5,000, and you have $5,000 in cash, would you invest that $5,000 into the stock today? If the answer is no, sell it.
If you are going to make your money back, do it in an investment you want to buy, which might recoup your money faster. There is no reason you have to recoup your money in the same investment. This is an emotional response to an investment decision that should be unemotional, in my opinion.