Understanding how losses can reduce your tax burden is essential. Whether you’re handling capital losses, non-capital losses, or considering carrying back losses to prior years, knowing the right procedures can result in significant tax savings. Let’s break down the basics of capital property, capital losses, non-capital losses, and how you can use them to lower your taxes.
What Is Capital Property?
In simple terms, capital property is something you buy or acquire with the intention of holding onto it for a longer time to generate income. This could include things like real estate, stocks, or bonds, which you expect to earn profit, interest, dividends, or rent over time. The key point is that you hold these assets for long-term income and not for quick resale.
What Is a Capital Loss?
A capital loss occurs when you sell a capital asset (like property or stocks) for less than what you originally paid for it. Capital losses can help reduce your tax bill by offsetting capital gains—which are profits from selling a capital asset.
Capital Loss: You sell a capital asset for less than you paid for it.
Capital Gain: If you sold an asset for more than you paid, that’s a profit.
Offsetting: If you have a capital loss, it can be used to offset capital gains in the same year, reducing the amount of tax you owe on those gains. If you don’t have enough capital gains to offset your capital loss in the same year, you can carry it back to offset gains in the past three years, or carry it forward to offset future capital gains indefinitely.
What Are Non-Capital Losses?
Non-capital losses are losses that come from regular income like your job, your business, or rental properties. These losses are not related to the sale of capital property. For example:
Losses from a business, rental property losses, and employment income losses cannot offset capital gains directly. However, they can reduce your overall taxable income, and in turn, reduce the amount of tax you owe.
Non-capital losses can be:
- Used to reduce your taxable income in the year they happen (i.e., offset against other income like salary or rental income).
- Carried back up to 3 years to offset income from those years.
- Carried forward for up to 20 years to offset future income.
How Non-Capital Losses Help to Offset Tax Payable
If you incur a non-capital loss, it can reduce your overall taxable income. This can result in paying less tax in the current year, or in future years when you might have higher income.
Carry it Back: You can carry the loss back for up to 3 years. This means you can reduce the taxes you paid in the previous years.
Carry it Forward: If you don’t use it in the current year or past years, you can carry it forward for up to 20 years to offset future income.
What Is a T1A Form?
The T1A form is used to request a loss carryback for Canadian taxpayers. If you have losses (either capital or non-capital), you can use this form to apply them to past tax years. For example, if you had a loss in 2023, you can use the T1A to apply it to previous years (up to 3 years back) to get a tax refund.
What Is the Inclusion Rate?
The inclusion rate is used by the Canada Revenue Agency (CRA) to calculate taxable capital gains and allowable capital losses. The inclusion rate tells you what percentage of your capital gain is taxable. The rate can change, but for many years it has been 50%. This means only 50% of your capital gain is included in your taxable income.
How Do I Carry My Loss Back to a Previous Year?
To carry a loss back, you need to:
1. Review your previous tax returns to see the maximum loss you can carry back.
2. Fill out the T1A form to apply your capital and non-capital losses to the prior years.
3. If the inclusion rate for the past year is different from the current year, you may need to adjust the claim accordingly.
Once the CRA receives your T1A, they will automatically reassess your previous tax returns and issue a refund if applicable.
Where Can I Check My Record of Net Capital Losses?
You can check your net capital losses from previous years by logging into your CRA My Account. This will show you any unused capital losses from earlier years, as well as losses applied in those years. You can also find this information in your Notice of Assessment.
How to Use Past Net Capital Losses to Lower Current Year Gains?
If you want to use net capital losses from previous years to reduce your current year’s capital gains, you can claim the deduction on line 25300 of your T1 tax return. For example, if you made a profit from selling investments in 2023 but have losses from previous years, you can apply those past losses to reduce the amount of tax you owe on your 2023 gains.
How Far Back Can I Carry My Losses?
In Canada, you can carry back a loss to the past three years. For example, if you're filing your 2023 tax return and have a loss in 2023, you can apply that loss to offset profits made in 2020, 2021, and 2022.
Types of Losses You Can Carry Back
You can carry back different types of losses, including:
Non-Capital Losses: Losses from employment, business, or rental income.
Capital Losses: Losses from selling assets like stocks or property.
Farming Losses
Fishing Losses
Restricted Farm Losses
Listed Personal Property Losses
How Does the T1A Form Affect My Current Year’s Tax Return?
Submitting a T1A Request for Loss Carryback will not change your current year’s tax return. The form is only used to apply losses to past years. Once the CRA processes the T1A, they will reassess your previous returns and issue any refunds if applicable.
Do I Need an Amended Return?
You don’t need to file an amended return if you're requesting a carryback. The CRA will automatically reassess your previous years based on the information from your T1A form, and issue a refund if you're owed one.
What Information Do I Need to Fill Out the T1A Form?
To fill out the T1A form, you'll need information such as:
- Employment income
- Business income
- Net capital losses from previous years
- Capital gains deductions
- Other relevant income or losses
Which Losses Can Be Applied to Similar Types of Gains?
Some losses can only be applied to the same type of gains. For example:
- Farming and fishing losses can only offset farming or fishing gains.
- Net capital losses can only offset capital gains.
- Listed personal property losses can only offset gains from listed personal property.
Which Year Should I Choose for Carryback to Get the Maximum Tax Refund?
To get the maximum tax refund, you should apply your current year’s losses to the earliest year possible in the past three years. For example, if you have a net capital loss in 2023, apply it to your 2020 tax year first, then 2021, and then 2022.
By carrying back your losses to previous years or carrying them forward to offset future income, you can reduce your tax liability and potentially lower your overall tax payments.
Posted on 14 November 2024