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moneysense.ca, 15/04/09
Use capital losses to reduce taxable income of previous years
[Thanks to Robert A. Smith, CFA, CFP, a Financial Advisor in Markham area and author of Dollars From Change (Review), for suggesting today's topic and providing most of the content in the post.]
If you have a net capital loss for the 2008 tax year (who doesn’t?) and reported taxable capital gains in 2005, 2006 or 2007, you can use the capital loss to reduce the taxable income for the previous year(s). It is relatively straightforward to do so: fill out Section III – Net capital loss for carryback in Form T1A Request for Loss Carryback in your paper return or your favourite tax software and file it along with your 2008 tax return. The Canada Revenue Agency will automatically reassess the prior year returns, typically within a week or two of assessing your current year’s return.
Let’s consider an example. You have net capital losses of $3,000 for the 2008 tax year and you want to carry it back to a previous year. You pull out your 2005 return and find that you reported capital gains of $1,200 in Line 127. However, you also offset $300 of that year’s capital gains with losses incurred prior to 2005 in Line 253. You should take the difference between Line 127 and Line 253 ($900 in our example) and report it in Line 6636 of Form T1A. Now, you have $2,100 left to carry over to tax years 2006 and 2007. Rinse and repeat this step.
There are a couple of things to watch out for:
First, carryback the loss to the earliest year possible (which would be 2005 for the 2008 tax year). Then, if you still have losses left, carry it to the next two years.
Make sure that taxes were payable in the preceding year(s) by checking Line 435. As you can only get a refund on taxes paid, there is no sense in carrying back a capital loss to a year when no taxes were payable. If you are unable to carryback the loss for any of the preceding three years, you can carry forward the capital loss for possible future use.
moneysense.ca, 15/04/09
While I applaud any opportunity to save money on income taxes, this one sounds like a mountain of paperwork to me.
Also, I didn’t “realize” a lot of my losses in 2008.
What happens if your spouse has capital gain in a previous year (say $10,000) and no other income, no taxes were paid, however if capital lose 0f $10,000 was carried back her income would drop to zero thus allowing the other spouse the ability to use her personal amount as a tax credit for that year. Would the CRA make that change automatically (assuming taxes for previous years were coupled) or would the spouse wishing to claim the tax credit have to file a separate T1 adj.at the same time?
Phil: I don’t think this is a mountain of paper work really. All you need is to look up prior year returns and fill out form T1A for 2008 (can be done with tax software). Of course, you could opt to carry it forward to a future year.
Finance Matters: Here’s what the capital gains guide says:
“When you apply a net capital loss back to a previous year’s taxable capital gain, it will reduce your taxable income for that previous year. However, your net income, which is used to calculate certain credits and benefits, will not change.”
Link
Financial Matters – CC is right when he says that the loss carryback occurs below the Net Income line (Line 236) and affects the Taxable Income Line (Line 260). Net income is used to determine eligibility for many government benefits, whereas Taxable Income is the starting point for calculating what you owe, before non-refundable credits reduce that amount.
It is a strange feature on the income tax act. Gains and losses that occur in the same year are netted out BEFORE net income is caculated, whereas when the are carried forward or back, they are dealt with on Line 253 which is AFTER net income. For what is essentially the same result when factored over a couple of years, the government taxes it very differently.
If your income is low and you feel you may qualify for GST/HST rebates, Provincial Sales Tax Credits, CTBs, or OAS supplements – you should remember this when deciding to crystalize any losses at the end of the year. When possible, it is sometimes more advantageous to wait and realize any losses in the same year as your gains… so your net income stays lower and you qualify for benefits (which are negative taxes if you will).
People with higher incomes need not worry about such matters – the government is making you a payer, not a receiver, of any benefits.
Phil – it does sound complicated and it is much easier with software, that is for sure. At the same time, it is basically 3 or 4 numbers keyed in and the money comes back. It is VERY lucrative and, I feel, an important part of minimizing the tax drain on non-registered investments. There is no point agonizing over MERs and commissions only to then waste the savings in avoidable taxes.
We found one client (albeit a client with a very large portfolio) $20K in capital gains taxes paid in the past three years, and are getting that back with about 3 extra minutes of work on his return. In December of 2008, we looked at all client’s prior tax returns and calculated what we could carry back if we had realized losses. We did tax-loss selling where appropriate and on average
our clients are receiving a few extra thousand in refunds.
Sure it would be better to never have losses in the first place, but at least the government can share the pain. They certainly come to the party when everybody is reporting gains.
I actually recorded a net capital gain in 2008. I do have some losses in 2009 from a stock I own which was taken private. So, I will have to wait until I file my 2009 income tax return before I can write any of that off… Hopefully the rules stay the same.
I was surprised to see a t3 and t5 in the mailbox that show I need to pay capital gains too! I guess I will be getting that back next year:)
I wonder whether a capital loss can be written off against a “capital gains distribution” from a publicly listed limited partnership?
A capital gains distribution is declared as a capital gains in your taxes, right? If so, I don’t see why you can’t write off capital losses against it.
[...] of taxes, chances are pretty good that people claimed capital losses on some investments in 2008. Learn how you carry back capital losses to offset capital gains from previous years, courtesy of the Canadian [...]
I am trying to understand this filing a little more, and have wrapped my mind around booking losses, but i don’t understand where on the T3 or T5 slips gains are reported, which feed line 127.
I have had gains in the previous years, and had a friend of the family do taxes, and looking back now i have noticed that nothing was written in those lines, eventhough i had provided him with all the slips.
so my questions is: if in the previous years no gains were recorded, although they were realized, will the CRA eventually find out, is this typically done only during the re-assessment?
Bo
Capital gains/losses on investment dispositions will not be found on a T5 or T3 (unless internal to a mutual fund). You may receive a t5008 from brokerage for non-registered investments. Mutual fund companies no longer seem to send T5008s but you will find a summary of gain/loss for the disposition of funds in the summary statements they send you. It’s up to you to keep track of these gains/losses as well as changes to your ACB. Hope this helps.
I want to carry back capital losses from 2008 to the years 2005, 2006, 2007. On my 2005 return I have taxable capital gains (line 127) of $15,557 and net capital losses of other years (line 253) of $2742. Should I carry back the difference between the two for 2005, and then the amounts on line 127 for 2006 and 2007 (years in which I carried forward no capital loss).
I sold two stocks in 2008, one had a gain of $10,000 and the other had a loss of $20,000. I have no tax withholding. Based on my other income and deductions, a $10,000 capital gain would mean I owe nothing in taxes. I would like to carry forward the entire $20,000 loss, but I am afraid that the CRA wants me to waste half of it creating a “net capital loss” of $10,000. Is there any way I can keep the loss for another year and claim only the gain?
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