When you dispose of an asset for less than its purchase price, you incur a capital loss. The Canada Revenue Agency allows you to deduct capital losses from capital gains on your tax return. If you want to keep your tax liability in check, it’s important to understand this process.
Capital Improvements and Sale Expenses
A capital loss is the difference between the price you paid for an asset and the price for which you sold it. For example, if you bought a building for $200,000 and you sold it for $150,000, you have a capital loss of $50,000. However, the CRA takes other costs into consideration when calculating losses.
Include capital improvements and expenses incurred in selling the asset. To continue with the above example, imagine you installed a new HVAC system while you owned the building, and the cost was $20,000. Additionally, you paid a real estate agent a $3,000 commission to sell the property. When you include those expenses, that increases the price you paid for the building from $200,000 to $223,000, and that increases your loss from $50,000 to $73,000.
Using Capital Losses
Use capital losses to offset capital gains. For example, if you sell stock and have taxable capital gains of $100,000, but you have a loss of $73,000 from selling a building, you may use the loss to offset the gain. That lowers your taxable capital gains to only $27,000, helping to save money on your tax bill.
However, if you don’t have capital gains in the current year, you can carry capital losses back three years and forward indefinitely. If you have a capital loss in 2016, you may use it to offset a capital gain from 2013, 2014 or 2015. Alternatively, you may save the loss and use it against a future gain.
Allowable Business Investment Losses
However, you may claim select losses against employment or business income. In particular, allowable business investment losses occur when you dispose of shares from small business corporations or when you write off debts owed to you by small business corporations. You may carry these losses back three years or forward 10 years. In the 11th year, however, ABIL become regular capital losses, so you may only claim them against capital gains.
Personal Versus Business Property Losses
If you dispose of personal property and experience a capital gain, you must report it. However, if you experience a personal capital loss, you cannot claim the loss. In contrast, you may be able to recapture some business income if you report a loss on the disposition of business-use property. Keep your personal and business assets separate, and remember to claim all of your business losses.
In most cases, you report capital losses on Schedule 3. However, if you own a business, you must report income using Form T2125 (Statement of Business or Professional Activities). Quality tax preparation software can ensure you report the right losses on the right forms, and it can help you leverage your losses to reduce your tax liability.