When a capital property or asset is sold for less than its acquisition price, a capital loss is realized. Capital assets include equity shares, bonds, real estate, and plant and equipment. A company’s capital losses can be offset against any taxable capital gains achieved within the same accounting period. Assume there are insufficient capital gains to balance the capital losses.
In that circumstance, most countries can carry such losses forward into subsequent years. When allowed capital losses exceed taxable capital gains, the difference is referred to as a net capital loss. An inclusion rate is a number that is used to figure out how much of a capital gain or loss is taxed and how much is not.
How Does It Work In Canada?
If you suffer a capital loss at any time during the year, you can use it to offset capital gains and so reduce your income. But assuming you don’t have any financial gains. In that instance, the Canada Revenue Agency lets you carry your losses forward or backward in order to apply them to different years’ returns. The time constraints and application requirements vary depending on the type of capital gain and other considerations.
There is something we call: Carrying Losses Backward
The CRA lets you take back up to three years of net capital losses. This is a tax advantageous way to get rid of capital gains from past years.
Check the inclusion rate for the year you want to use your losses to figure out how much you can carry back. If it is different from the inclusion rate for the current year, you must change your claim.
But if the rate of participation in the three years before this one was the same. It is not necessary to make any modifications at this time. Fill out part II of form T1A, Request for Loss Carryback, to take back a financial loss. You don’t need to file a new tax return for the year you want to use the loss.
Your taxable income goes down when you fill out form T1A and report your losses. This means you may get a tax return or pay less in back taxes. But this change doesn’t affect your net income or your ability to get benefits, because you can’t get retroactive benefits if you carry a capital loss backward.
When you sell or are thought to have sold a capital asset for less than its adjusted cost base plus the cost of selling it, this is called a capital loss. Find out how to figure out your capital gain or loss by reading Calculating your capital gain or loss.
Generally, let’s say you had an acceptable capital loss in a year. If so, you must subtract it from your taxable cash gain for the year question. If you still have a loss after, it becomes part of your net capital loss. You can then use a net capital loss to lower your taxed capital gain from the three years before or from any year after that.
For example, Leah sold two different stocks in 2021. This gave her a taxable capital gain of $300 (1/2 x $600) and an allowable capital loss of $500 (1/2 x $1,000). After subtracting her taxed capital gain from her allowable capital loss, Leah still has $200 ($500 – $300) in allowable capital losses that she hasn’t used yet.
Even though she can’t subtract the $200 from her other income in 2022, the $200 is added to her net capital loss for that year. She can use the net capital loss to reduce the amount of taxed capital gains she made in the three years before or in any year after that. Leah fills out Schedule 3 and sends it with her income tax and benefits return for 2022. This will make sure that CRA’s records are up-to-date with her net capital loss.
In 2021, if you had a capital loss, you could use it to cancel out any capital gains you made that year. If your capital losses are bigger than the total capital gains, you may have a net capital loss for the year.
In general, you can apply your net capital losses to taxable capital gains from the three years before and any years after that. An “inclusion rate” (IR) is the rate used to figure out “taxable capital gains” and “allowable capital losses.” This rate has changed over time. So, the amount of net capital losses from other years that you can use to reduce your taxed capital gain depends on the IR that was in effect when the loss and the gain happened.
If you have questions about net capital loss, it’s best to speak with a Chartered Professional Accountant.