Can Capital Losses Reduce Capital Gains on Your Tax Return in Canada?

You sold some investments at a gain and others at a loss, and you want to know whether the losses can cut your tax bill. In Canada, they often can, but the rules about how losses are counted and where they can be used are specific.

This article explains how losses are matched against gains, what cannot be offset, and what happens to a loss you cannot use this year. Your own facts matter, so a lawyer or accountant can confirm how this applies to you.

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

How losses offset gains

The taxable capital gain for a year is one-half of the capital gain, and the allowable capital loss is one-half of the capital loss.

If your taxable capital gains are more than your allowable capital losses, the difference is included on line 12700 of your T1 return. It is added to your other income and taxed at your marginal rates, not at a separate flat rate.

Working out each gain or loss

For each sale, subtract the adjusted cost base (ACB) and the outlays and expenses of selling from the proceeds of disposition. A positive result is a gain and a negative result is a loss. On Schedule 3, Part 3, these appear in columns for proceeds, ACB, outlays and expenses, and gain or loss.

• ACB is usually the cost plus expenses to acquire the property, such as commissions and legal fees.
• Current expenses such as maintenance and repairs cannot be added to the cost base.
• Identical properties, such as shares of the same class, use an average ACB.
• For foreign-currency sales, convert proceeds, ACB and outlays at the exchange rates the CRA describes, and report in Canadian dollars.

A negative result on Schedule 3 is a net capital loss and does not go to line 12700.

What cannot be offset

Net capital losses can be applied only against taxable capital gains, so they cannot reduce your employment, interest or other income. Some situations deserve particular care.

• Superficial losses: a loss is superficial if you or an affiliated person 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 you or your spouse control.
• A superficial loss cannot be deducted, and it is usually added to the cost base of the substituted property.
• Certain situations, such as the owner becoming a non-resident or the owner's death, are not treated as superficial losses.
• Allowable business investment losses (ABILs) are an exception, as they can be deducted against other income, not just capital gains.

Whether trading is a capital matter or a business matter also affects things. The CRA looks at whether you are trading or investing, and a short holding period alone is not conclusive. Business profit is fully included in income, while only half of a capital gain is taxable.

Unused net capital losses

If your losses exceed your gains, the excess is a net capital loss. It 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 the taxable capital gains in the year you apply it.

Carrying a loss back reduces taxable income but does not change net income. It may also reduce a lifetime capital gains deduction claimed in that year or later years. An ABIL that is not used can become a non-capital loss, and one not used within 10 tax years becomes a net capital loss in the eleventh year.

What to do next

• List every sale in the calendar year it occurred, even if the result is a loss.
• Check whether you or a spouse bought the same shares within 30 days before or after a loss sale.
• Report gains and losses on Schedule 3 and file a return even if no tax is owing.
• Decide whether to carry a net loss back using Form T1A or keep it for later years.
• Keep records of ACB, commissions and exchange rates.

If your situation involves a large loss, a business-like pattern of trading, or the lifetime exemption, speak with a lawyer or accountant before filing.

Frequently asked questions