How to carry back a capital loss for a tax refund

It sounds like you are aware that you can carry back capital losses, Ramesh. If you have a net capital loss on your 2023 tax return, you can carry it back up to three years. So, you can ask the Canada Revenue Agency (CRA) to apply that loss to capital gains you had in 2022, 2021 or 2020.

When should you carry back a capital loss?

You can apply some or all of the loss to one or more of those years. If you had capital gains in more than one of the past three years, there are three primary considerations.

1. 2023 is the final year you can carry back losses to 2020. In 2024, the furthest you can carry back a capital loss is 2021.

2. If you had a high income in one of those three years, you might be better off carrying the loss back to the year with the highest income. That way, you can maximize the resulting tax refund.

3. If your income and tax rate were relatively low in one or more of the past three years, you might want to defer claiming the loss. Capital losses can be carried forward indefinitely to use against capital gains in a future higher-income tax year.

You are not restricted, Ramesh, to claiming a capital loss on securities against a capital gain on securities. So, in your case, you could carry back a capital loss on securities to claim against a previous capital gain on a rental property.

How to carry back a capital loss

In order to carry back a capital loss, you have to complete Section III – Net capital loss for carryback on Form T1A, Request for Loss Carryback on your tax return. Although it can be printed, filled out and submitted to the CRA, a taxpayer or their accountant would generally submit the form as part of their annual tax filing.

After your tax return for the current year is assessed, you will later receive a notice of reassessment from the CRA with a tax refund for a previous year, if applicable.

When do capital gain and loss rules apply?

The capital gain and loss rules most commonly apply to stocks, bonds, mutual funds or exchange-traded funds (ETFs). They can also apply to the sale of a rental property, a business or other capital assets. They do not apply to capital gains on a primary residence under the principal residence exemption.

You have to report any capital gain from the sale of personal-use property, as long as either the sale price or the adjusted cost base (ACB) was more than $1,000.

Restrictions on reporting capital losses

Although capital gains on personal-use property, such as cars, boats, furniture or a cottage, are taxable, capital losses on the sale of personal-use property are not generally deductible. However, this restriction does not apply:

1. If the personal-use property is listed personal property, like prints, etchings, drawings, paintings, sculptures or other similar works of art; jewellery; rare folios, rare manuscripts or rare books; stamps; or coins. The CRA considers listed personal property to be personal-use property that usually increases in value over time.

2. If you had a bad debt owed to you from the sale of personal-use property to a person with whom you deal at arm’s length (i.e., not a family member).

In summary, Ramesh, you should be able to carry your 2023 securities capital losses back to your 2022 rental property capital gain. This may result in a tax refund. Whether or not you should carry the loss back—or back to that specific year—depends on your personal circumstances.

Read more from Jason Heath:

• Should you sell investments at a loss to pay off debt?
• What should Canadian investors do: Sell or hold with preferred share losses?
• What is considered day trading in a TFSA
• Selling stocks at a loss in a TFSA: What it means for your contribution room

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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