If you are investing in Canada, it is essential to understand how capital loss works. Capital loss arises when you are selling an investment at a price below its original cost. While it may be disappointing, a capital loss can help reduce your overall tax burden.
In this guide, we will explore how capital loss carry back works in Canada and how to claim it.
What is Capital Loss?
A capital loss happens when an asset is traded for a price lower than its initial acquisition cost. Picture yourself purchasing a stock for $1,000 and later selling it for $500, resulting in a capital loss totalling $500.
Capital losses can be utilized to reduce capital gains in the same tax year, and a net capital loss may occur if losses exceed gains. A net capital loss can be netted against capital gains in the three preceding years and to taxable income in any future year.
When Does Capital Loss Occur?
In the Canadian financial landscape, a capital loss arises when the money received from liquidating your units or shares is not greater than the sum of the Cost Adjustment and any relevant expenditures. When you redeem your units or shares, any capital loss can be used to reduce any capital gains you had in the year.
How to Carry Forward Capital Loss?
If any allowable capital loss remains after applying it to prior years’ taxable capital gains, it becomes a part of your yearly net capital loss accumulation.
Net capital losses can be carried back up to three years or carried forwards to any future year to offset taxable capital gains. To carry back a net capital loss, you need to follow the applicable instructions, as explained in.
What is Allowable Business Investment Loss?
An allowable business investment loss (some refer to as ABIL) is created when you invest in a small business corporation that fails or becomes bankrupt. If you have an ABIL, you can carry it back three years or forward ten years and claim it against regular income. If unclaimed within the specified timeframe, the ABIL merges with your net capital losses, which can solely be applied against capital gains.
What is Loss Carryback?
Loss carryback in Canada can be applied to the tax returns of any of the preceding three years. Suppose you experienced an $8,000 capital gain in 2020 and a $5,000 capital loss in 2022; you could request a 2022 loss carryback to your 2020 tax return. There’s no need to adjust your 2020 return; simply provide Form T1A – Request for Loss Carryback.
How to Claim Capital Loss?
Claim capital losses by completing Schedule 3 of your return and reporting ths losses on line 12700 of the personal income tax return (T1). In case your capital loss surpasses your capital gains for the year, the loss can be carried back to any of the prior three years.
Final Thoughts
Capital loss can help reduce your overall tax burden in Canada. In case of a net capital loss for the year, you can use it to counterbalance taxable capital gains of the prior three years and to taxable income in any upcoming year. To carry forward your net capital loss, you can carry it back up to three years or forward to any future year.