When you dispose of an asset for less than its purchase price, you incur a capital loss. The Canada Revenue Agency (CRA) 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
The difference in the price your pay for an asset and the price for which you sell it comprises capital loss. For example, if you buy a building for $200,000 and sell it for $150,000, you have a capital loss of $50,000. The CRA takes other costs into consideration when calculating capital losses in Canada, including capital improvements and expenses you incur when you sell the asset. To continue with the above example, imagine you install a new HVAC system while you own the building for a cost of $20,000. Also, you pay a real estate agent a $3,000 commission to sell the property. When you include those $23,000 in expenses, the price you pay for the building increases from $200,000 to $223,000. These extra expenses mean your capital loss rises from $50,000 to $73,000.
Canada Capital Loss Tax Rules
In Canada, you can use capital losses to offset capital gains. For example, if you sell stock and have a taxable capital gain of $100,000, but you have a loss of $73,000 from selling a building, you may use the loss to offset the gain. This lowers your taxable capital gain to only $27,000, helping save money on your tax bill. If you don’t have capital gains in the current year, you can carry capital losses back three years and forward indefinitely. For example, if you have a capital loss in 2018, you can use it to offset a capital gain from 2015, 2016, or 2017. Alternatively, you can save the loss and use it against a future gain.
Allowable Business Investment Losses
You can claim select losses against employment or business income. In particular, allowable business investment losses occur when you dispose of small business corporation share or write off debts small business corporations owe to you. You can carry these losses back three years or forward 10 years. In the 11th year, allowable business investment losses become regular capital losses, so you can 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 to the CRA in that tax year, but you have control of when you deduct business losses. If you experience a personal capital loss, however, you can’t 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. To navigate the process smoothly with tax authorities, keep your personal and business assets separate. In most cases, you report capital losses on Schedule 3. If you own a business, you must report income using Form T2125, Statement of Business or Professional Activities.
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