Capital loss

I had to advise a friend on how to report capital loss. I thought of sharing that advice.

You incur capital loss when you sell your investments (stocks, mutual funds etc) for less than cost you bought it.  You capital loss can only applied to reduce capital gain and not any other income (there is exception capital loss in the year of death)

Let’s say you have a capital loss in 2010 for 15K and your capital gains for 2010 is 5K. Then your net capital loss is 10K. You have to apply to the current year gain before carrying back or carry forward the loss.

This can be carried back three years (2007, 2008 and 2009) or carried forward indefinitely. In order to apply to another year, you should have reported net capital gain in those years.  Lets say you have reported following capital gains in the prior years

2007 – 5K

2008 – 15K

2009 –10K

The allocation of capital loss will be based on your net income in the prior years. This way you will get higher refund.  For example if your income in 2008 is low and 2007 and 2009 high. Then the loss will be allocated to 2007 and 2009.  If you did not have any tax paid in the prior three years, it will be beneficial to carry forward the loss to future years.

The net loss 10K should be reported in the 2010 tax return and then if you are carrying back to prior years, you should complete a section III of  the T1A form  to apply the loss to the prior years.

Check CRA website for further information.