I’ve done quite a few articles on taxation before, but I realize that I’ve never written about calculating capital loss specifically. This article comes with perfect timing as most investors have losses in their non-registered portfolios this year and perhaps seriously considering pulling the trigger to claim those capital losses.
What is a capital loss?
It’s simply where you sell a stock in your non-registered portfolio for a loss. From here, it just seems like a loss, but there is a bright side. Unlike investments within your RRSP (or TFSA), capital losses within a non-registered portfolio can be claimed against your capital gains for the year (or previous years).
Here are some important facts about capital losses:
- Capital losses can only be claimed on investments within taxable investment accounts.
- Only 50% of capital losses can be claimed.
- Capital losses can be claimed against capital gains in the current year, up to 3 previous years or carried forward indefinitely. However, it can be claimed against income on the year of the tax payers death (comforting hey?).
- Tax loss selling must be made before December 24 of that year as it takes 3 days to settle the trade.
How Tax Loss Selling Works – An Example
Say for example Jim (@ 40% MTR) had $10,000 in capital gains in 2008, but also $4,000 in capital losses. What is the resulting tax payable?
There are two ways to calculate this, both of which turn out with the same result:
- $10,000 – $4,000 = $6,000 x 50% x 40% = $1,200 tax payable
- $10,000 x 50% X 40% = $2,000 capital gains tax; $4,000 X 50% X 40% = $800 capital loss claim; result = $1,200 tax payable.
Last question is why would you sell for tax loss? Sometimes at the end of the year, you realize that you’ve made some bad stock picks that have a low probability of recovering. Why not dump the losers, claim the tax deduction and move on?
As I’m not a tax advisor, this is simply my interpretation from government documentation on how capital loss is calculated. Tax experts are welcome to chime in on any errors.