Capital Losses Not Worthless

Capital losses are important. They can offset capital gains of the year, the prior three years or any future year.

Example: Marissa funded her real estate improvements by selling one of her investments. She had purchased the shares for $12,000 and at the time of sale they were worth $11,500. She paid brokerage fees of $125 on the trade. Her loss was calculated as follows:

This loss will be used to offset the capital gains of the year, $40,000 in this case. Marissa’s net capital gain, therefore is $40,000 less $625 = $39,375 and the taxable gain is 50% of this or $19,687.50.

Many investors think that because they have no capital gains this year to absorb losses, as Marissa did, that the capital loss they incurred is worthless. This is not so.

Capital Loss Carry Back. Marissa’s brother, Mark, was not so lucky this year. He lost $30,000 in the stock market. He had no other capital gains this year, but last year he had a great year; he made $40,000 in the stock market. He can now reach back and recover some of the taxes he paid last year with a loss carry back. He would use Form T1A Request for Loss Carry Back to do so.

Capital losses can be carried back to offset capital gains in the previous three years or, at Mark’s option, he could have carried those losses forward, for use against future capital gains. The carry over options (back or forward) do not need to be made in any particular order.

In Mark’s case, his other income of the year was $65,000 from employment. He paid $13,365 in taxes on his total income. The loss carry back created a refund of $4,672 and so was very worthwhile. Mark contributed that extra money to his TFSA.

Adjusting Prior Filed Returns to Claim Losses. If you have missed claiming a capital loss anytime in the past 10 years, consider making an adjustment to those prior-filed returns.

Classification of Property. There are special rules for the classification of certain capital properties that are important in understanding how to claim losses. A very special tax break, the Capital Gains Deduction is also available on the disposition of certain investments.

Capital property does not include inventory of a business or insurance policies, with the exception of units in segregated fund trusts.