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Capital Losses

Income Tax Act s. 3(b), 38(a) 111(1)(b), 111(2)

Definitions

Inclusion Rate (IR) for Capital Gains and Losses

Capital Losses / Inclusion Rate on the Notice of Assessment

Deduction of Capital Losses

Pre-1986 Capital Losses

Capital Losses and Death of a Taxpayer

Business Investment Loss

Superficial Losses and Non-Deductible Losses

Capital Losses on the Tax Return

Capital Losses Carried Forward Complications

Tax Tip

TaxTips.ca Resources

Canada Revenue Agency (CRA) Resources

Definitions

When the inclusion rate is 2/3^rds:

Net capital losses = the excess of allowable capital losses over taxable capital gains.

Inclusion Rate (IR) for Capital Gains and Losses

Income Tax Act s. 38(a)

An allowable capital loss is the capital loss times the inclusion rate for the year in which the loss occurred.  The inclusion rates for capital gains and losses have changed over the years.  When an inclusion rate change is announced by the federal government, the new rate would usually be effective on or after the day after the announcement.  The following table shows the inclusion rates for each period, starting in 1972 when capital gains first became taxable in Canada:

(1) The 2024 Federal Budget proposes:

Capital Losses / Inclusion Rate on the Notice of Assessment

If you have unused net capital losses from previous years, the amount will be shown on your latest assessment notice from CRA.  The amount shown on the assessment notice is the net capital loss.  In order to use some or all of these losses on the current year tax return, you would claim the amount of the net capital loss on line 25300 of your tax return.  This amount claimed cannot exceed the amount of taxable capital gains that you are showing on line 12700 of your return.

Your assessment notice should indicate if your inclusion rate differs from the current inclusion rate.  For 2000, where there were 3 different rates, your assessment notice should show a combined inclusion rate for all net capital losses of that year.

If the inclusion rate from your net capital losses from previous years is different from the current year inclusion rate, you will have to adjust the amounts to the current year inclusion rate.  The formula for converting prior net capital losses is

   Prior net capital loss  ÷   Prior IR   x Current IR

For instance, if your net capital loss with a 2/3 inclusion rate was $2,000, and you are using this to offset taxable capital gains with an inclusion rate of 1/2, the adjusted net capital loss to use would be 

$2,000 ÷ 2/3 x 1/2 = $1,500

The $1,500 would be entered on line 25300 of your tax return, as long as your taxable capital gains on line 12700 are at least $1,500.

If you have net capital losses carried forward from 1985 and earlier years, special rules apply.  The CRA guide T4037 Capital Gains has a section regarding how to apply your net capital losses of other years to the current tax year, which includes information on pre-1986 losses.

Deduction of Capital Losses

Capital losses can normally only be used to reduce or eliminate capital gains.  They cannot be used to reduce other income.

If you have capital losses that exceed capital gains in the current year, you have a net capital loss.  You can (but don't have to) carry back the net capital loss to any of the 3 preceding taxation years to be deducted against taxable capital gains in those years.  Net capital losses can also be carried forward indefinitely. They can be used to offset taxable capital gains (in part or in full) in future years, but there is no requirement to use them when capital gains arise.

Pre-1986 Capital Losses

Income Tax Act s. 111(1.1)

If a taxpayer has pre-1986 net capital losses, up to $2,000 of those losses can be used each tax year to reduce other income.  For more information on this, see Chart 5 - Applying net capital losses of other years to 2021 (for taxpayers with a pre-1986 capital loss balance) on the CRA website.

Capital Losses and Death of a Taxpayer

Capital losses can be used to reduce other income (instead of just reducing capital gains) in the year of a taxpayer's death, or the immediately preceding year.  At this time, the net capital loss (50% of the capital loss, when the inclusion rate is 50%) would be used to reduce other income.  This is done by entering a negative amount on line 12700 of the tax return, which will be done automatically by tax software (from Schedule 3) if you indicate that the return is a return for the year of death.

The net capital loss used to reduce other income must be ignored when calculating certain tax credits and clawbacks that use net income before taxes from line 23400.  Again, tax return software will do this automatically.

See also Death of a Taxpayer / Loss on Residence Sold by Estate.

For more on this topic, see the Canada Revenue Agency (CRA) interpretation bulletin IT232R3 - Losses - Their Deductibility in the Loss Year or Other Years (Archived) paragraph 30, and T4011 Preparing Returns for Deceased Persons Chapter 5 - Net Capital Losses.

Business Investment Loss

A loss on shares or debt may be considered a business investment loss instead of a capital loss, in certain circumstances.  See our article Business Investment Loss and allowable business investment loss (ABIL).

Superficial Losses and Non-Deductible Losses

If you plan to sell shares at a loss and buy them back either before or after selling them, see our article on Superficial Losses to ensure that your loss isn't disallowed.

Losses on transfers of shares to an RRSP, TFSA, DPSP or RDSP are not deductible.

Capital Losses on the Tax Return

Your capital gains and losses must be recorded on the tax return for the year in which the losses occurred.  This applies even when the losses exceed the gains, and cannot be used in the current year.  These losses will then be available to use in a future tax year, or can be carried back.

Current year capital gains and losses are reported on Schedule 3 when filing your tax return.  When allowable capital losses exceed taxable capital gains in a year, the difference is the net capital loss for the year.

To carry back your current year net capital losses to prior years, you would file form T1A - Request for loss carryback with your tax return.

If you want to revise a previous year's return in which you should have reported capital losses, you would file form T1Adj.  See our article on changing your tax return.

Capital Losses Carried Forward Complications

Be aware that when net capital losses carried forward are used to reduce taxable capital gains in a subsequent year, they are deducted on line 25300 of the tax return, which is after the calculation of line 23600, net income for tax purposes. Capital gains in the year may still cause an increase in tax.  This is because there are tax credits, such as the medical expense tax credit and age amount tax credit, as well as clawbacks of Old Age Security benefits and employment insurance benefits, that are based on:

Some income-tested benefits, such as the GST/HST tax credit, and the Child Tax Benefit, are also calculated based on line 23600.

See our article on how to calculate Total Income For Tax Purposes, Net Income For Tax Purposes, and Taxable Income. If possible, it may be best to dispose of some investments with capital gains to offset those capital losses so they don't have to be carried forward.

See Capital Gains Can Increase Your OAS Clawback - even if you have net capital losses carried forward that will completely eliminate the taxable capital gains.

Tax Tip:

It may be better for tax purposes to offset your capital losses with capital gains instead of carrying them forward, if possible!  That is, if you have investments with unrealized gains, sell some to offset the losses.

TaxTips.ca Resources

Superficial Losses and Other Disallowed Losses

Transfer Capital Losses to a Spouse

Worthless Shares or Debt

Business Investment Losses

Deemed Disposition of Property

Canada Revenue Agency (CRA) Resources

Capital Gains Guide T4037

Revised: April 18, 2024