Capital losses occur when you sell capital property for less than you bought it for. Since capital gains are taxable, it follows that losses should be deductible. However, there are special rules in place that you must follow.
Deductibility of Losses
Capital losses occur when your proceeds of disposition of capital property are less than your adjusted cost base.
- Generally, your proceeds of disposition are what you sold the property for less any costs associated with the sale.
- Your adjusted cost base is what you paid for the property plus any capital outlays you made over the years.
Capital property is any property, whether tangible or intangible, that you purchased with a view of holding for a certain time until it appreciates.
Common examples of capital property include:
- real estate
- precious metals
- intellectual-property such as trademarks
Capital losses are only deductible against capital gains.
You cannot use capital losses to offset any other type of income, such as a salary or dividends. As a rule, if you had a capital loss in a year, you have to apply it against your capital gains for that year. If your gains for that year are too low to offset the loss completely, it is added to a notional account called net capital losses that you can use to reduce your capital gains in any of the three preceding years or in any future year.
Carrying Losses Forward
Capital losses can be carried forward indefinitely and so are never lost.
- To do this, enter the amount you are claiming as a deduction on line 25300 of your income tax return ( T1).
- To claim the correct amount, you will need to be aware of the inclusion rate for the year of your loss.
Inclusion rate means the percentage of the capital gain that is included in your income. In previous years, it fluctuated greatly, so the Canada Revenue Agency publishes a list of inclusion rates for previous years. If your inclusion rate is 50 percent and you have a gross loss of $100,000, then your amount eligible to be carried forward is $50,000.
Tracking the Balance of Your Capital Losses
Since capital losses are carried forward indefinitely, it is possible to forget the amount that you have available or to fail to recall that you have losses at all.
If you have a capital gain this year and want to know what your balance is, you can find it in two places:
- First, it will be indicated on your latest notice of assessment.
- Second, it can be easily retrieved online using the CRA’s My Account portal.
- After logging in, click on the Tax Returns tab at the top of the page and then follow the link called Carryover Amounts. Your information will be on the following page.
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