16 Dec Capital losses 101: Using capital losses to your benefit
By Bilal Kathrada, CPA, CA
Originally published by CPABC’s Industry Update.
As the holidays draw near, so does the deadline to sell capital property if you want to apply the gains or losses to your 2018 income tax return. To be applicable, all capital property transactions must be completed by December 31. In my previous article, I explained how capital gains are taxed at half the standard rate – so it’s important to understand how to correctly calculate capital gains and losses. Capital losses work differently than gains in your income tax return – and I’ll explain how.
A recap on capital property and gains
As a reminder, capital property includes tangible property such as real estate, vehicles, stocks, bonds, cryptocurrencies, collectibles, and art, as well as intangible property such as patents and trademarks. If you sell this type of property for more than what you’ve originally paid, you have a capital gain; the exception being if you sell this type of property on a regular basis. If that’s the case, then this may be considered regular income – and excluded from capital gains. If you sell capital property for less than the original cost, you have a capital loss.
To calculate whether you have a capital gain or loss, you take the selling price of your capital property and deduct what’s known as the adjusted cost base (ACB), which is the original cost plus any fees or expenditures incurred in selling the property. If you have a capital gain, this amount is added to your income, but you’re only taxed on 50% of the gain.
How do capital losses benefit me?
Unlike capital gains, capital losses don’t directly impact your income. For example, if you sold capital property for less than your ACB, your regular income won’t be reduced. However, if you also had a capital gain that same year, you can use your capital loss to offset your capital gain reducing the amount of income tax you need to pay.
The hard rule is that if you experience a capital loss the same year you have a capital gain, you must use your capital loss to reduce your capital gain in the same year.
For example, if you have a capital gain of $1,950 from selling a stock, but you also have a capital loss of $500 from selling some cryptocurrency during the year, you can deduct that $500 from your $1,950 gain – meaning your capital gain will be reduced to $1,450. And of course, you’ll only be taxed on 50% of this, or $725.
But what if you had a capital loss this year, but no gain? You can choose to carry back your capital loss up to three years prior, offsetting any capital gains incurred during any of these years, which could lead to you receiving a tax refund. To do this, you would fill out Form T1A (Request for Loss Carryback) on your personal income tax return. Alternatively, you can hang on to your capital loss from this year and use it to offset a capital gain in the future. There is no time limit as to how far you can carry a capital loss forward.
Are there any exemptions to the capital gains tax?
There are some exemptions for qualified small business corporation shares and qualified farm or fishing property for Canadian residents. This includes taxpayers who became residents partway through the taxation year in question. As the exemptions can be complicated, consult a chartered professional accountant to determine whether your property qualifies for the lifetime capital gains exemption and to answer any other questions you may have about capital gains and losses.
As the clock counts down the remainder of 2018, don’t forget that any capital gains or losses for your 2018 tax return must have been settled within the calendar year.
Bilal Kathrada, CPA, CA, is a partner at Clearline Chartered Professional Accountants specializing in income tax and succession planning for Canadian owner-managed businesses in various industries. Bilal is a member of the CPABC Taxation Forum and is CPABC’s media expert on RRSPs and income tax filings. Visit rrspandtaxtips.com for more tax-related tips.