Capital gains and losses offer a number of tax advantages for reducing amounts owed on your federal return. Average investors planning for retirement look to retirement savings plans, pensions, and tax-free savings accounts, but there may be situations where claiming capital gains or losses might save you money on investments outside of typical retirement savings vehicles.
Understanding Capital Gains and Losses
“Capital gains and losses refer, in essence, to the difference between purchase and sale prices for capital properties, as defined by the Canada Revenue Agency,” says Terry Baker, fellow chartered insurance professional with Investors Group in London, Ontario. “When the sale price is higher, you’ve earned a capital gain. When it is lower, you have a capital loss.” The CRA defines capital property as depreciable property that, if sold, would gain or lose money, typically purchased for investment or income purposes. Common types of capital property include second homes, land or equipment used for rental income, and stocks, bonds, or shares.
Reporting Capital Gains
The capital gains are claimed by completing schedule 3 for the current tax year, to report eligible capital gains from all sources. Once calculated, 50% of the total is transferred to line 12700 of your tax return as your taxable capital gain amount.
There are two courses of action you may use in the case of a capital gain to reduce the taxable amount:
Claiming a capital gain deduction: When you sell a qualified small business corporation shares or a qualified farm or fishing property, you will be able to claim capital gain deductions on line 25400. There is a deduction limit based on the type of property you are disposing of.
Claiming a capital gain reserve: When you receive the payment for the sale of over a number of years, you can claim a reserve to allow you to report a portion of the gains every year. In addition to schedule 3, complete form T2017, Summary of Reserves on Dispositions of Capital Property. For example; if you sold property worth $50,000 with an agreement to receive annual payments of $10,000, use form T2017 to calculate your annual capital gain amount.
You must sell the capital property to claim the capital gain.
As the property sits in your portfolio, it is not subject to gains or losses, though it may be active in your tax situation as depreciation or capital cost allowance.
Reporting Capital Losses
Just as with capital gains, capital losses are reported using schedule 3, and allowable losses may be used to offset gains within the current year, up to three years prior, or carried forward to future years, depending on the situation.
For example; capital gains on personal property items are earned and reported, but capital losses on these items may not be eligible. Losses are somewhat more restricted than gains, and carrying losses forward requires a calculation of a capital loss adjustment factor, which depends on the carrying year. Despite the additional calculations, since capital losses apply directly to offset taxable capital gains, the tax savings may be worth consideration.
Minimizing Tax Using Capital Gains and Losses
Since capital gains and losses come into play only when you dispose of capital property, planning when to sell an item may be strategic. For example; if you plan to sell a stock for a profit near the end of a calendar year, delaying until January defers paying tax on the capital gain until the tax return is due in April, 15 months in the future.
- Since capital losses offset capital gains, if you have an unavoidable loss, you may choose to sell a capital property that results in a gain.
- The loss legally shelters your gain, so you could re-invest both your original investment and the amount it has earned, increasing your cost base on the new investment, reducing the amount of future gains, and therefore also the tax liability.
Nancy bought 200 shares of stocks 2 years ago. Each share cost $15. Last year she sold 100 of them for $10. This year she sold the other 100 shares for $20. Each time she pays $100 for broker fees to sell and no fees for purchase price:
Calculate gain or loss = Proceeds (sale price) – Adjusted Cost Base (purchase price + purchase fees) – outlays (sale fees)
Last year she had a gain loss of: 100 shares x $10 – 100 x $15 – $100 = -$600 = ($600) loss
This year she has a gain of: 100 shares x $20 – 100 x $15 – $100 = $400 gain
Since last year she didn’t have any capital gains, she will not be able to apply the $600 loss against her income and she will be able to carry it forward. This year, she has a capital gain of $400. So she can use $400 from the previous year’s loss and claim it against her capital gain, so she has no taxable gain left. The remaining $200 loss from last year can still be carried forward.
TurboTax Premier can guide you when reporting your capital gains and losses, especially from an investment or business. Consider TurboTax Live Assist & Review if you need further guidance, and get unlimited help and advice as you do your taxes, plus a final review before you file. Or, choose TurboTax Live Full Service* and have one of our tax experts do your return from start to finish.
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References & Resources
- Canada Revenue Agency: Calculating and Reporting Your Capital Gains and Losses
- Terry R. Baker, B.A. FCIP; Investors Group, London, ON