Using Capital Losses to Reduce Capital Gains in Canada

A losing investment is never welcome, but the tax system lets you use that loss to reduce tax on gains. How you do it depends on the type of loss and on what you do around the time you sell.

This article explains how losses offset gains, what they cannot reduce, and how unused losses are carried to other years. Your own facts can change the outcome, so treat it as a general guide.

This article covers Canadian federal tax law, which applies in every province.

How losses offset gains

Only half of a capital loss counts. The allowable capital loss is one-half of the capital loss, just as the taxable capital gain is one-half of the gain.

To work out a gain or loss, subtract the property's ACB and the outlays and expenses of selling from the proceeds of disposition. In a CRA example, 400 shares sold for $6,500 with a $60 commission and a $4,000 ACB give a gain of $2,440, and half of it, $1,220, is the taxable capital gain.

The one-half inclusion rate applies to gains realized in 2024, 2025 and 2026, because the proposed increase to two-thirds never took effect and was cancelled. Rules can change with future budgets, so it is worth confirming the current rate before you file.

If taxable capital gains exceed allowable capital losses, the difference goes on line 12700 and is taxed at your marginal rates with your other income. A negative result on Schedule 3, a net capital loss, does not go to line 12700.

What losses cannot be deducted against

Net capital losses can be applied only against taxable capital gains, not against salary or other income.

Exception: an allowable business investment loss (ABIL) can be deducted against other income. Any unused excess becomes a non-capital loss, which carries back 3 years and forward 10, and an ABIL not used within 10 tax years becomes a net capital loss in the eleventh year.

Carrying losses back and forward

A net capital loss can be carried back three years and carried forward indefinitely. Losses from earlier years are applied oldest first, and the amount applied is limited to taxable capital gains in the year applied.

To carry a loss back, use Part 5 of Form T1A (Request for Loss Carryback) and do not file an amended return for the earlier year. A 2025 net capital loss can go back to 2022, 2023 or 2024. Carrying it back reduces taxable income but does not change net income.

Be careful if you used the lifetime exemption. Carrying a loss back may reduce a capital gains deduction claimed in that year or later years.

The superficial loss trap

A loss is superficial if you, or a person affiliated with you, acquires the same or identical property from 30 days before to 30 days after the sale and still owns it, or has a right to acquire it, at the end of that period.

Affiliated persons include your spouse or common-law partner and a corporation that you or your spouse control. A superficial loss cannot be deducted, and it is usually added to the cost base of the substituted property.

Some situations, such as the owner becoming a non-resident or the owner's death, are not treated as superficial losses.

Your ACB also affects the size of the loss. It is usually the cost of the property plus the expenses to acquire it, such as commissions and legal fees, and current expenses such as maintenance and repairs cannot be added. For identical properties, such as shares of the same class, you use an average ACB that is recalculated at each purchase.

What to do next

Report a disposition in the calendar year the sale or deemed sale occurs, and report amounts in Canadian dollars. For a foreign-currency sale, convert the proceeds at the exchange rate at the time of the sale, the ACB at the rate when the property was acquired, and outlays at the rate when they were incurred.

• Calculate each gain or loss on Schedule 3 using proceeds, ACB and selling costs.
• Before selling at a loss, check whether you or a spouse, common-law partner or controlled corporation will buy the same property within the 30-day windows.
• Decide whether to apply the loss this year, or carry it back or forward.
• If you carry back, file Form T1A rather than amending the earlier return.
• Ask a lawyer or accountant about losses on private company shares, since an ABIL may apply.

Frequently asked questions