Can a capital loss reduce the capital gains tax I owe on a property sale?

Yes. Under the federal Income Tax Act, capital losses can be applied against capital gains, which reduces the net amount included in your income. If you sell one investment at a loss in the same tax year you sell another at a gain, the losses offset the gains and only the net taxable gain is included in your income.

If your capital losses in a year exceed your capital gains, you have a "net capital loss." You cannot use a net capital loss to offset ordinary income. However, you can carry it back three taxation years to recover tax previously paid on capital gains, or carry it forward indefinitely to shelter future capital gains.

Two important limitations apply. First, the "superficial loss" rule denies a loss if you or an affiliated person buys the same or an identical property within 30 days before or after the sale — this prevents selling and immediately rebuying to crystallize a paper loss. Second, allowable business investment losses (ABILs) from certain small business shares are a special category that can sometimes offset ordinary income, but the rules are complex.