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By Jason Heath, CFP on January 16, 2024
Estimated reading time: 4 minutes
By Jason Heath, CFP on January 16, 2024
Estimated reading time: 4 minutes
Let’s look at the rules and restrictions around carrying back a capital loss, as well as three things to consider before taking that step.
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Could you please confirm if I can apply a loss on the sale of investment securities in 2023 to a capital gain on the sale of an investment property in 2022, and claim a refund of part of the capital gains tax paid in 2022?
—Ramesh
Capital loss carry back: How it works
When you file your tax return, you have to consolidate all of your capital gains and capital losses for the year from different investments. This may lead to a net capital gain or a net capital loss for the year. When the result is a net loss, you have options.
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It sounds like you are aware that you can carry back capital losses, Ramesh. If you have a net capital loss on your 2023 tax return, you can carry it back up to three years. So, you can ask the Canada Revenue Agency (CRA) to apply that loss to capital gains you had in 2022, 2021 or 2020.
When should you carry back a capital loss?
You can apply some or all of the loss to one or more of those years. If you had capital gains in more than one of the past three years, there are three primary considerations.
1. 2023 is the final year you can carry back losses to 2020. In 2024, the furthest you can carry back a capital loss is 2021.
2. If you had a high income in one of those three years, you might be better off carrying the loss back to the year with the highest income. That way, you can maximize the resulting tax refund.
3. If your income and tax rate were relatively low in one or more of the past three years, you might want to defer claiming the loss. Capital losses can be carried forward indefinitely to use against capital gains in a future higher-income tax year.
You are not restricted, Ramesh, to claiming a capital loss on securities against a capital gain on securities. So, in your case, you could carry back a capital loss on securities to claim against a previous capital gain on a rental property.
Selling assets? Read our capital gains guide.Read now
How to carry back a capital loss
In order to carry back a capital loss, you have to complete Section III – Net capital loss for carryback on Form T1A, Request for Loss Carryback on your tax return. Although it can be printed, filled out and submitted to the CRA, a taxpayer or their accountant would generally submit the form as part of their annual tax filing.
After your tax return for the current year is assessed, you will later receive a notice of reassessment from the CRA with a tax refund for a previous year, if applicable.
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When do capital gain and loss rules apply?
The capital gain and loss rules most commonly apply to stocks, bonds, mutual funds or exchange-traded funds (ETFs). They can also apply to the sale of a rental property, a business or other capital assets. They do not apply to capital gains on a primary residence under the principal residence exemption.
You have to report any capital gain from the sale of personal-use property, as long as either the sale price or the adjusted cost base (ACB) was more than $1,000.
Restrictions on reporting capital losses
Although capital gains on personal-use property, such as cars, boats, furniture or a cottage, are taxable, capital losses on the sale of personal-use property are not generally deductible. However, this restriction does not apply:
1. If the personal-use property is listed personal property, like prints, etchings, drawings, paintings, sculptures or other similar works of art; jewellery; rare folios, rare manuscripts or rare books; stamps; or coins. The CRA considers listed personal property to be personal-use property that usually increases in value over time.
2. If you had a bad debt owed to you from the sale of personal-use property to a person with whom you deal at arm’s length (i.e., not a family member).
In summary, Ramesh, you should be able to carry your 2023 securities capital losses back to your 2022 rental property capital gain. This may result in a tax refund. Whether or not you should carry the loss back—or back to that specific year—depends on your personal circ*mstances.
Read more from Jason Heath:
- Should you sell investments at a loss to pay off debt?
- What should Canadian investors do: Sell or hold with preferred share losses?
- What is considered day trading in a TFSA
- Selling stocks at a loss in a TFSA: What it means for your contribution room
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I'm a financial expert with a deep understanding of tax regulations, especially in the context of capital gains and losses. My expertise is demonstrated by an in-depth knowledge of the content in the article written by Jason Heath, a Certified Financial Planner (CFP), published on January 16, 2024.
In the article, the reader, Ramesh, seeks guidance on applying a loss on the sale of investment securities in 2023 to a capital gain on the sale of an investment property in 2022, with the intention of claiming a refund of part of the capital gains tax paid in 2022.
Here are the key concepts discussed in the article:
-
Capital Loss Carry Back:
- When filing a tax return, individuals must consolidate all capital gains and losses for the year from different investments.
- If there is a net capital loss for the year, it can be carried back up to three years.
-
Carrying Back a Capital Loss:
- The article advises Ramesh that he can carry back a capital loss on his 2023 tax return to apply it to capital gains in 2022, 2021, or 2020.
- Three primary considerations are mentioned:
- 2023 is the final year to carry back losses to 2020.
- Consider carrying the loss back to the year with the highest income for maximum tax refund.
- If income and tax rate were low in the past three years, deferring claiming the loss might be beneficial.
-
Applying Loss to Different Types of Investments:
- Ramesh is informed that he is not restricted to claiming a capital loss on securities against a capital gain on securities. He can carry back a capital loss on securities to claim against a previous capital gain on a rental property.
-
Procedure to Carry Back a Capital Loss:
- To carry back a capital loss, individuals need to complete Section III – Net capital loss for carryback on Form T1A, Request for Loss Carryback, as part of their annual tax filing.
- After the tax return is assessed, a notice of reassessment from the Canada Revenue Agency (CRA) with a tax refund for a previous year may be received.
-
Capital Gain and Loss Rules:
- Capital gain and loss rules apply to various investments, including stocks, bonds, mutual funds, ETFs, and the sale of rental properties or businesses.
- There are restrictions on reporting capital losses for personal-use property, but exemptions exist for listed personal property or bad debts owed.
In summary, Ramesh should be able to carry his 2023 securities capital losses back to his 2022 rental property capital gain, potentially resulting in a tax refund. The decision on whether to carry the loss back depends on personal circ*mstances.
Feel free to ask if you have any specific questions or need further clarification on the concepts discussed.