Income Tax Act s. 3(b), 111(1)(b), 111(2)
Capital losses can normally only
be used to reduce or eliminate capital gains. They cannot be used to reduce other income.
have capital losses that cannot be used in the current
year, you can carry back the losses to any of the 3
preceding taxation years. Capital losses can also be
carried forward indefinitely. The only time they can be used to reduce
other income is in the year of a taxpayer's death, or the immediately
preceding year. At this time, 1/2 (50%) of the capital loss would be used to
reduce other income. For more on this topic,
see the Canada Revenue Agency (CRA) interpretation bulletin IT232R3
- Losses - Their Deductibility in the Loss Year or Other
Years (paragraph 30).
A loss on shares or debt may be considered a
business investment loss instead of a capital loss, in certain
circumstances. See our link below to the article on business
Some capital losses may be
losses, and disallowed. Also, losses on transfers
of shares to an RRSP, TFSA, DPSP or RDSP are not deductible.
Your capital gains and losses
must be recorded on the tax return for the year in which the losses
occurred. This applies even when the losses exceed the gains, and cannot be
used in the current year. These losses will then be available to use in a
future tax year. Current year capital gains and
losses are reported on Schedule
3 when filing your tax return. To carry back your current year net
capital losses to prior years, you would file form T1A
- Request for loss carryback with your tax return.
If you want to revise a previous
year's return in which you should have reported capital losses, you would file form
T1Adj. See our article on changing
your tax return.
Be aware that
when capital losses carried forward are used to reduce capital gains
in a subsequent year, the capital gains may still cause an increase
in tax. This is because there are tax credits, such as the medical
expense tax credit and age amount tax
credit, as well as clawbacks
of Old Age Security benefits and employment insurance benefits,
that are based on your net income before adjustments (line 234) or
your net income for tax purposes (line 236), which are before the
deduction of losses carried forward. Some income-tested
benefits, such as the GST/HST tax credit, and the Child Tax Benefit,
are also calculated based on line 236. See our article on how to calculate Total
Income For Tax Purposes, Net Income For Tax Purposes, and Taxable Income.
If possible, it may be best to dispose of some investments with
capital gains to offset those capital losses so they don't have to be
If you have unused net
capital losses from previous years, the amount will be shown
on your latest assessment notice from CRA. The amount
shown on the assessment notice is the net
capital loss, which in recent years has been 1/2 (inclusion
rate) of the capital loss. In order to use some or all
of these losses on the current year tax return, you would
claim the amount of the net capital loss on line 253 of your
tax return. This amount claimed cannot exceed the
amount of taxable capital gains that you are showing on line
127 of your return.
An allowable capital loss is the
capital loss times the inclusion rate for the year in which the loss
occurred. The inclusion rates for
capital gains and losses have changed over the years.
The following table shows the inclusion rates for each
Your assessment notice should indicate if your inclusion
rate differs from the current inclusion rate of 1/2.
For 2000, where there were 3 different rates, your
assessment notice should show a combined inclusion rate for
all net capital losses of that year.
If the inclusion rate from
your net capital losses from previous years is different
from the current year inclusion rate, you will have to
adjust the amounts to the current year inclusion rate of
1/2. The formula for converting prior net capital
For instance, if your net
capital loss with a 2/3 inclusion rate was $2,000, and you
are using this to offset taxable capital gains with an
inclusion rate of 1/2, the adjusted net capital loss to use
$2,000 ÷ 2/3
x 1/2 = $1,500
The $1,500 would be entered
on line 253 of your tax return, as long as your taxable
capital gains on line 127 are at least $1,500.
If you have net capital
losses carried forward from 1985 and earlier years, special
rules apply. The CRA guide T4037 Capital Gains has a
section regarding how
to apply your net capital losses of other years to the
current tax year, which includes information on pre-1986