If you carry capital losses forward or backward, the Canada Revenue Agency has a set procedure for how it applies those losses. This may affect the income against which you can claim your losses, as well as the order in which your losses are applied.
Using Capital Losses to Offset Income
If you have capital losses, you can use them to lower your capital gains for the year to help reduce your tax burden. However, if you don’t have enough capital gains for the year, the CRA allows you to carry forward your capital losses and claim them against capital gains in future years.
If your capital gains fall into certain categories, you can only claim them against specific types of capital gains. In other cases, you can claim them more widely. In some other cases, the type of income that you can apply them against changes depending on the length of time since you incurred the capital loss.
Carrying Forward Different Types of Capital Losses
If you have losses from listed personal property, you may carry them forward up to seven years. You can claim them against capital gains on other listed personal property such as art, collectibles and jewellery.
Similarly, if you have farm losses, you can only claim them against farming income. However, if they occurred after 2005, you can carry them forward up to 20 years. Additionally, you can claim them against capital gains that are incurred if you sell your farm land.
Allowable business investment losses — which arise from the sale of qualifying small business corporation shares or qualified farm and fishing property — can be carried forward ten years and used against any type of business income. However, when you carry these losses into the eleventh year, they become net capital losses. Accordingly, they can only be claimed against other capital losses.
Applying Capital Losses to Current Gains
If you are applying capital losses from previous years to your current year’s income tax return, the CRA will not allow you to pick and choose which losses you apply. Instead, the CRA will apply the oldest losses first.
For example, if you have capital losses between 1990 and 2014, the losses from 1990 must be applied first.
Losses Prior to May 23, 1985
While the CRA allows you to carry forward capital losses indefinitely, special rules apply to losses incurred prior to May 23, 1985.
As these losses are likely to be some of the oldest you may have, you must apply them to your capital gains before you can apply newer losses. However, if you have unused capital losses from this time period, you can use up to $2,000 to offset any type of income.