Introduction
If you’re wondering what a non-capital loss is, don’t worry: I was too. Luckily, after some research and some digging through the Canadian Income Tax Act (ITA), I can now tell you that these losses can be used to reduce your taxes within the year. At first glance, this may not seem like much but if you can use non-capital losses against other sources of income during tax time, then it could make all the difference! In this article, we’ll go over what a non-capital loss is and how it affects your taxes in Canada.
What is capital loss?
Capital losses are losses on the sale of capital property. Capital property includes land, buildings, equipment and other things used to earn income. You can carry forward (or back) your capital loss against any future capital gains. If there is no future capital gain to use the loss against, you may be able to claim a deduction for this amount on line 221 – Other deductions in your return for the year it was incurred.
Capital Losses vs Non-Capital Losses
When you sell an investment at a loss, it’s important to understand whether or not this transaction qualifies as either:
- A “capital loss”; or
- A “non-capital loss”.
What is non-capital loss?
Non-capital losses are losses that are not related to capital gains or losses. Examples of non-capital losses include:
- Business or rental property losses
- Employment expenses, such as travel costs and tools you use for your job
- Spousal support payments made because of a court order (not including child support)
- Losses from foreign currency transactions
Losses from business activities that are not passive, such as a loss from an activity in which you materially participated. Losses that are due to theft or casualty, but only if the property stolen is covered by insurance
When to use a non-capital loss.
You can use a non-capital loss to offset capital gains and other sources of income and reduce your taxable income.
- To offset capital gains: If you sold an investment at a loss but have other investments that have increased in value since then, you can use the loss to reduce or eliminate your taxable gain on those other investments. For example, if you sold shares for $5,000 less than what they were originally purchased for ($10,000) but still hold some other shares with unrealized gains (value = $15). You could recognize this as an allowable capital loss that would be applied against those unrealized gains until wiped out completely (or partially) before claiming any further losses from selling more assets.*
How to use a non-capital loss.
To use a non-capital loss, you must first wait until the end of the year to claim it. This can be done on your tax return or as an adjustment for next year’s return. If you’re using the latter option, note that any unused portion of your non-capital loss will be carried forward to future years–so make sure not to spend it all at once!
There are three ways that Canadians can use their non-capital losses:
- To offset capital gains – You can claim any unused portion against any gains that occurred in the same year or previous years (but not future years).
- To reduce other types of income – You may also be able to apply part or all of your non-capital loss toward reducing other types of income, such as wages earned from employment or pensions paid into RRSPs/RRIFs/TFSAs (tax-free savings accounts). This could lower how much tax you owe for these sources by up to $3 per dollar saved with this method; however, there are limits based on age and other factors which may affect how much savings are available towards each type listed above before reaching those limits so check with us before attempting something like this if unsure about whether it will work for yourself specifically!
Carrying Capital Losses Backward or Forward
When carrying capital losses back to previous years, you can use the amount that exceeds your income and deductions for the year you incurred them. For example, if you have a capital loss of $5,000 but only earned $4,000 in 2018 and had no other expenses or deductions (i.e., those related to business), then you can carry back this unused capital loss to 2017 when it was still available and deduct it from your income there.
The benefit of carrying forward unused capital losses is that they may be applied against future years’ incomes until they are fully used up–you don’t need to use them all at once! This means that if one year has no net capital gains or losses, but several others do, then those gains could offset losses from prior years until there are none left over for claiming against future earnings as well!
Non-capital loss carries forward is a tax law that allows you to carry forward your non-capital losses and apply them against future income. You can also use your capital loss carry forward to offset capital gains in the same or prior year. If you have both types of losses, you must first use the capital loss carryforwards before using non-capital loss carryforwards.
Non-capital losses can be used in certain situations to help reduce your taxes within the year.
Non-capital losses can be used in certain situations to help reduce your taxes within the year. However, they can also be carried forward or backwards for up to 5 years.
In addition, if you have a non-capital loss from one year and a capital gain from another year, you can use both amounts as part of your overall capital gain or loss for that particular year.
The same applies to capital losses and capital gains. However, suppose you’re carrying a loss forward or backwards from one year to another, unrelated to the sale of any property or shares. In that case, you can claim this loss as part of your overall capital gains or losses in that particular year.
Conclusion
As you can see, a non-capital loss is a great way to reduce your taxes in Canada. If you have any questions about how this works or want help filing your taxes, contact a qualified tax accountant today!
