Tax Benefits of Losses

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 The Canadian Institute of Chartered Accountants  provided the below information relating to Tax Benefits of Losses.

Taxpayers may use losses to reduce their tax liability in the same, earlier or later taxation years, subject to certain limits and conditions. The limits and conditions largely depend on the character of the particular loss, with different rules applying to the particular type of loss.

This article discusses some considerations in the tax treatment of: allowable capital losses, allowable business investment losses and non-capital losses.

Allowable Capital Losses you have an allowable capital loss when you sell, or are considered to have sold, a non-depreciable capital asset (say an investment or real estate) for less than its adjusted cost base plus the outlays and expenses involved in selling the property. In other words, the capital loss arises becuase the amount realized from the sale of the asset is less than its purchase price. The allowable capital loss is deducted against any taxable capital gains you have. Generally, one-half of the capital loss can be offset against one-half of the capital gain. Hoever, allowable capital losses usually cannot be offset against oher income sources, such as business income or earned income.

The adjusted cost base is usually the cost of a property plus any expenses you incurred to acquire it, such as commissions and legal fees. The cost of a capital property is its actual or deemed cost, depending on the type of property and how you acquired it. Cost also includes capital expenditures for additions and improvements. However, you cannot add current expenses, such as maintenance and repair costs, to the cost base of a property.

Some capital losses, such as the loss on personal-use property, cannot be claimed for tax purposes. For example, if you sell the family cottage at a loss, the loss will be denied for tax purposes.

Allowable capital losses can be used to reduce your taxable capital gains in the year the loss was realized, carried forward to future years or applied to previous gains. For example, if you sell a non-registered investment at a capital loss and the loss cannot be used in the current year, the loss (referred to as a net capital loss) can be:   carried forward indefinitely to reduce the taxable capital gains in the future or carried back three years and applied to taxable capital gains in those years.

When you apply a net capital loss back to a previous year’s taxable capital gain, it will reduce your taxable income for that previous year. However, your net income, which is used to calculate certain credits and benefits (such as the child tax benefit or the clawback of Old Age Security) will not change.

There are additional tax implications for a loss from the sale of a depreciable property (for example, a rental property). Certain rules on capital cost allowance (CCA) may require the recapture of CCA to be added to youir income or allow you to claim a terminal loss.

To be able to claim a capital loss, you will need to keep careful records, including: a descripion of the capital property, purchase price and date of purchase -documentation of any borrowings, including payments and interest charges, that were used to finance the purchase – any costs incurred for the purchase of the capital property (legal fees, brokerage fees, transfer fees, etc) and – documentation and details of the sale, including price, date and any costs incurred.

Before You Act individuals and corporations may be able to realize certain tax benefits to help offset the impact of capital and non capital losses. However, while you may be tempted to gain some tax benefit from your losses, be sure to talke to a CA before taking any action.

CA: Paul Winstanley Ltd. paul@winstanley.ca

Source: The Canadian Institute of Chartered Accountants

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