How Capital Losses Affect Income Tax

If you suffer a capital loss, you may be able to report the loss on your income tax return, which can lower your taxable income and reducing the amount of tax you owe. However, it’s important to note that the Canada Revenue Agency has different rules regarding different types of capital losses. Depending on the specific type of loss you have, your income may be affected differently.

A capital loss occurs when you dispose of capital property at a loss.

To calculate whether you have a gain or a loss, start with the proceeds of disposition which is the amount you received for selling the asset. If you gave the property away, use its fair market value. Next, subtract the adjusted cost base of the asset — the price you paid to acquire it plus the cost of any capital improvements — and costs you incurred to purchase it.

• If the difference is negative, you can claim a capital loss on your tax return.
• You can only claim it against capital gains unless it falls into one of the below categories.

An Allowable Business Investment Loss (ABIL) occurs when you dispose of qualifying investment property at a loss.

Property in this category includes:

• qualified small business corporation shares
• qualified farm and fishing property
• bad debts from bankrupt or insolvent small businesses

If you have an ABIL, you may claim it against any type of business income — not only capital gains. If you don’t have enough income in the year of disposition, you are not required to use the entire value of your ABIL in the year it occurs. Instead, you can carry your ABIL back up to three years and forward up to ten years.

In the eleventh year, any unused ABIL converts into net capital losses. At that point, you can carry net capital losses forward indefinitely, but you can only claim them against capital gains.

• If you have a capital loss related to the disposition of farm property such as land, buildings or equipment, you can carry that loss back three years or forward ten years.
• You can claim it against any type of income you have reported.

If you have restricted farm losses, you can carry them backward three years and forward 20 years. Restricted farm losses occur when farming is not your primary income source.

• If you dispose of personal-use property at a loss, you typically cannot report the loss on your income tax return.
• However, if the loss occurs from the disposition of art, certain collectors items or jewelry, you can claim it on your income tax return.

You can carry these losses back three years and forward seven years, but you can only claim them against capital gains that result from the sale of other personal-use property.

A superficial capital loss occurs when you have a capital loss, but either you or a person affiliated with you acquires the property within 30 days of disposing the property. Unfortunately, you cannot claim superficial losses on your tax return.