Clients can experience capital loss any time they dispose of investments or other capital property. As a financial advisor, you must be able to explain when a capital loss happens as well as how it interacts with capital gains.
In this article, Wealth Professional Canada will talk about capital loss, how much your clients can claim, and what happens if losses are not reported correctly. You can also scroll to the bottom for the latest capital loss news for the latest developments.
A capital loss happens when your clients sell, or are considered to have sold, a capital property. This occurs when the property is sold for less than the total of its adjusted cost base (ACB) and any expenses related to the sale. The property can be something obvious such as a security, but the rules apply to a wide range of capital assets.
However, your clients are not always required to sell the property for a capital loss to arise. Under Canadian tax rules, a person can be considered to have disposed of capital property in several situations, such as:
Any of these events can give rise to a capital gain or a capital loss, depending on how the proceeds compare with the ACB and selling costs.
What can you do as a financial advisor when your clients' condo investments go underwater? Advise them to use capital loss to offset future or past gains and ease the tax impact. Read the linked article if you'd like to learn more!
To determine whether a capital loss exists, you must calculate the capital gain or loss on each disposition. These three amounts are needed:
To figure out your clients' capital gain or loss, start with their proceeds of disposition. Then subtract the total of the property's ACB and any outlays and expenses that your clients incurred to sell it.
Capital losses are first applied against capital gains in the same year. Your clients can use allowable capital losses to reduce their taxable capital gains down to zero for that year.
In Canada, only a portion of the capital gain is taxable, and only a similar portion of the capital loss is allowable. This portion is called the inclusion rate.
For recent years, the inclusion rate for capital gains and allowable capital losses is one half. Historical inclusion rates differ and this becomes important when your clients want to use older net capital losses against current gains.
Suppose your clients have more allowable capital losses than taxable capital gains in 2025. After using enough losses to reduce their taxable capital gains for 2025 to zero, there can still be unused allowable capital losses. These combine with certain other amounts to form the net capital loss for 2025.
Net capital losses cannot be deducted from other income in 2025. Instead, they are stored and can be used to reduce taxable capital gains in other years. Your clients can carry a net capital loss back to any of the three previous years or carry it forward to any future year.
When your clients have a capital loss or capital gain in 2025, they must complete Schedule 3, Capital Gains or Losses. This is to make sure that the Canada Revenue Agency (CRA) records the activity.
When they want to use a 2025 net capital loss to reduce taxable capital gains in 2022, 2023 or 2024, they complete Part 5 of Form T1A, Request for Loss Carryback.
A net capital loss carried back will lower taxable income in that earlier year. However, it will not change net income for that earlier year, which is the figure the CRA uses to calculate many credits and benefits.
Losses incurred before May 23, 1985 have extra flexibility. Normally, net capital losses of other years can only offset taxable capital gains. Once earlier losses have been used to reduce taxable capital gains, any excess from this pre‑1986 balance remains. In some cases, this excess can be used to reduce other income, up to certain limits.
The amount of excess that can be used in this way is limited to the smallest of three amounts:
If your clients had a net capital loss between January 1, 1985 and May 22, 1985, this would create a pre‑1986 balance. If they then realized taxable capital gains later in 1985, those gains would have reduced the pre‑1986 balance.
When your clients dispose of Canadian securities, there can be a gain or loss either on capital account or on income account. In many cases, investors treat their securities as capital property, although active traders might have business income.
Canadian tax rules allow an election that simplifies this distinction for Canadian securities. In the year when your clients dispose of Canadian securities, they can report all gains and losses on those securities as capital gains and capital losses. If they use this election for a tax year, the CRA will consider every Canadian security held in that year and in later years as a capital property.
Your client makes this election by filing Form T123, Election on Disposition of Canadian Securities, with the relevant Income Tax and Benefit Return. Once the election is made, it cannot be undone. Traders or dealers in securities, other than mutual fund trusts or mutual fund corporations, and non-residents at the time of sale cannot use this election.
If Canadian securities are held in a partnership, each partner is treated as owning their share of the securities. Each partner can decide individually whether to make the election. One partner's decision does not bind the others.
When your clients sell capital property for a loss then they or an affiliated person buys the same or identical property, a superficial loss can occur. This can take place during a period that starts 30 days before the sale and ends 30 days after it.
A superficial loss cannot be deducted when your clients calculate income for the year. If they acquired the substituted property, the denied loss is usually added to that property's ACB. Watch this clip to learn more:
For high‑net‑worth clients, realizing a capital loss through creative tax optimization strategies can lock in tax savings that outlast a single bad year.
Yes, the CRA tracks net capital losses once your clients report them through the required forms and schedules. When they file their Income Tax and Benefit Return and include Schedule 3, the CRA receives details of their capital gains and capital losses for that year.
If your clients have a net capital loss for 2025 and they want to carry that loss back to earlier years, filing Form T1A updates the CRA's records. The form records how much of the net capital loss is being used against taxable capital gains in 2022, 2023, or 2024. It also records how much remains for the future.
Similarly, when your clients claim a deduction on line 25300 for net capital losses of other years, this tells the CRA about the existing loss balance. It shows how much of that balance has now been used. The remaining loss balance carries forward automatically on future notices of assessment or reassessment.
Provided that your clients have reported the relevant transactions and elections, the CRA also keeps running balances for other special situations such as:
In practice, this means that it is critical to file complete and accurate returns with the correct schedules. This ensures that the CRA continues to report the right loss balances to your clients in later years.
If your clients have disposed of capital property, they must report the disposition on an Income Tax and Benefit Return for that year. This requirement holds even if there is no tax payable.
It is also applicable whether the outcome is a capital gain, a capital loss, or neither. The same applies when your clients have a taxable portion of a capital gains reserve from an earlier year.
If a capital loss is not reported on Schedule 3 for the year it arises, it will not form part of the net capital loss balance on the CRA's records. That means that your clients will not be able to carry that loss back to earlier years or forward to future years. For financial planning purposes, unreported losses represent missed opportunities to reduce taxable capital gains in other periods.
When your clients have a net capital loss and do not request a carryback through Form T1A, the loss will instead remain available for carryforward. They can still use it in later years, provided it has been recorded properly and subject to inclusion rate adjustments and ordering rules.
Encourage your clients to report every disposition of capital property, even when no tax seems payable. In doing so, they build an accurate record with the CRA. Forms and related worksheets might seem like paperwork, but they preserve valuable loss balances that can reduce taxable capital gains for many years to come.
As markets shift and your clients' circumstances change, capital losses will continue to appear in their portfolios. When you know how to recognize those losses, apply them correctly and explain their impact simply.
This way, you can guide your clients when deciding about when to sell, how to donate certain properties, and how to time gains and losses across years. When used wisely, capital loss can help reduce the tax burden linked to capital gains over time.
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