While capital gains are subject to tax, obviously, capital losses are deductible by the same token. But do you know that with some caveats, you can carry your capital losses forward to offset taxes on capital gains in the future? One step at a time, let’s go through what counts as a capital loss, and how you can benefit from them.
What may be considered a capital loss as per the CRA?
When you dispose of a capital property for less than your adjusted cost base (ACB, i.e. the cost of a property and the expenses to acquire it.), the money you lose from the disposition is considered a capital loss.
Common examples of the capital property include but are not limited to real estate, precious metals, artwork, intellectual property such as patents or trademarks, or financial products such as shares or bunds. In a nutshell, the capital property can be both tangible as motor vehicles or lands, and intangible as intellectual properties or financial assets. That said, it’s important to demarcate listed personal property (LPP) for tax purposes. While LPP is considered capital property, the loss incurred from the disposition of an LPP is not deductible given how the CRA considers it as a personal loss other than a capital loss. Please be advised that cases vary between individuals, and you may need to file a ruling to determine whether the painting on the wall in your hallway is capital property or LPP.
Can I deduct any income with capital losses?
Unfortunately, no. With capital losses, you can only deduct capital gains. Such incomes as salary or dividends are not considered capital gains, and whose taxes are not deductible. In general, you can use the capital losses to deduct capital gains generated in the same year. However, if the gains are derisory – which might be the case for many businesses that have tried to keep their heads above the water throughout the nightmare of 2020 – losses will accrue to net capital losses, a notional account, of which you can avail to deduct future gains.
How do I carry my losses forward?
Enter the number of your capital losses as a deduction on line 25300 of your income tax return (T1). Please note the inclusion rate for the year when the loss incurred; that is, the percentage of the capital gain in your income. For example, you have generated a capital gain of $100,000 in the year when the inclusion rate is 50%, $50,000 from the gain needs to be added to your personal income for tax purposes. Likewise, if you have incurred a gross loss of $100,000, the eligible amount for you to carry forward is also $50,000. Please be reminded that inclusion rates vary in different years. To ensure the accuracy of your claim, do check with the CRA on the rate for the year when a loss occurs. Alternatively, you can find the list of inclusion rates here.
Where do I find the balance of my capital losses?
It may take a while for you and your business to bounce back from setbacks, and kudos to your tenacity. That said, how to be sure of the number of losses from past years? Here are two ways you can stay on top of all the eligible claims. First off, you can find all the eligible losses in your latest notice of assessment. In addition, you may find the information in the CRA My Account. Once you have logged in, find the Tax Returns tab at the top of the page and click on Carryover Amounts.
Is there a time limit to claim my capital losses?
Rest assured, capital losses can be carried forward indefinitely. Any loss of today is a gain for tomorrow. Remember this silver lining, and buck up! You’ve got this! If you need further assistance, give us a holler, and we’ll take it from there.