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And what tax forms should be used?
Q. I just received a report from my brokerage noting the value of one of my investments was cut in half. Can this loss report be used to lower taxes and how does that work? I understand there is also a specific form used for Canada Revenue, but I’m not sure which ones I need. Thanks, Leslie
A. The loss on stocks (and any other capital asset) is a capital loss. Capital losses may be used to reduce capital gains in the year of sale, any of the immediate three years, or any future year. Capital losses cannot decrease your income from any other source, except in the year that you die.
So, if you experience a capital loss in the current tax year, first you use the loss to reduce any capital gains reported in the year. The reporting is done on Schedule 3 of your tax return.
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Then, you may carry unabsorbed losses back to any of the previous three years to reduce capital gains reported in those years. Use form T1A Loss Carry Back to do so.
If the prior year gains are not sufficient to absorb the loss, any left-over amount can be carried forward indefinitely and applied to any capital gain reported in those years.
But if you pass away before you use up all your capital losses, they may be applied against any type of income in the year of death. If that income is not sufficient to absorb all the losses, the leftover capital losses may be applied to the year immediately before death.
These losses, therefore are extremely lucrative and can affect the taxes paid on your accrued gains over several taxation years around the year of the loss. Be sure to harvest those losses carefully—that is, don’t miss reporting them, even if there is no tax advantage this year.
If you have overlooked them, request an adjustment to your tax return using form T1-ADJ. You can also do so electronically through My Account on the CRA website. Omissions and corrections to prior filed returns are available for 10 years—all the way back to tax year 2007 now—as long as you make the request before the end of the current calendar year.
Evelyn Jacks is a tax expert, author, and founder and of Knowledge Bureau in Winnipeg
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