Capital Losses - Selectively Apply within Tax Year

[joeclarke]

I'm 99% certain I know the answer to this, but I hope I'm wrong.

As my income is solely from investments, I usually take capital losses on equities at calendar year-end to try and minimize taxation.

I overshot my requirements during 2011 and ended up taking more trading losses than I needed to bring my net taxes payable to zero for 2011.

I still ended the year with net capital gains, but my tax bill is zero. I could exclude several losing trades from my capital activities for the year and still have a zero tax bill.

Would be very nice if I could cherry pick individual trading losses and carry them into a different tax year, but I sure don't see a way to do that within any of the CRA forms or literature.

Any ideas?

[caricole]

Any ideas?

Try the following, file 2 Schedule 3

One with al the capital gains and one with all the capital losses

Their literature states....capital losses can be used against capital gains of this year, the 3 preceding years or carried forward idefinitely

Then file 2 forms....carry back (some) losses to 2011 together with a T1 Adjustment request using only the amount of desired losses

The balance will be carried forward

my opinion

[Arby]

I don't think Caricole's suggestion will work. Any capital losses have to be applied first against the capital gains in the same year. If there are any remaining losses after that, then they can be carried back or forward. The OP said that after applying the current year losses against the current year gains, he still has a positive gain. So he has zero remaining losses from the current year that are available to carry back or forward.

Following is an excerpt from CRA's website:

Generally, if you had an allowable capital loss in a year, you have to apply it against your taxable capital gain for that year. If you still have a loss, it becomes part of the computation of your net capital loss for the year. You can use a net capital loss to reduce your taxable capital gain in any of the three preceding years or in any future year.

[caricole]

I agree that carrey back wont work, but using part of the losses only en carrey forward the rest seems worthwile requesting in wring

It is playing on words

Generally, if you had an allowable capital loss in a year, you have to apply it against your taxable capital gain for that year

It means «GENERALLY» and not «ALL ALLOWABLE CAPITAL LOSS MUST.....»

Nothing to loose ...just requesting and see what will happen

If it is refused, it is lost for ever....WHO KNOWS

joeclarke was asking for IDEAS

This is mine...dont forget, if something is not 100% clear, the benefit must be given to the taxpayer

my opinion

[DavidR]

It won't work, caricole. In order to carry a capital loss to another year, you have to report a net capital loss on Schedule 3. When joeclarke reports the losses on Schedule 3 for 2011, they will be deducted against the gains that he reports for 2011. Joeclarke says the gains of 2011 are larger than the losses of 2011, so there is a taxable capital gain for the year, not a net capital loss.

How can he file a tax return in a future year and ask CRA to apply a loss from 2011?

CRA will say "What loss? We have no loss recorded in our system. The 2011 schedule 3 shows a capital gain..."

[max88]

If you have any stocks that, on or before Dec 31, 2011, were at a gain, you can "crystallize" the gains for tax year 2011, thus increasing their ACB, effectively reducing taxable gains in future years. The amount of "crystallized" gains should be up to the point no tax is payable.

[joeclarke]

If you have any stocks that, on or before Dec 31, 2011, were at a gain, you can "crystallize" the gains for tax year 2011, thus increasing their ACB, effectively reducing taxable gains in future years. The amount of "crystallized" gains should be up to the point no tax is payable.

Interesting discussion on this topic, thanks for the ideas.

This concept sounds like an excellent approach - lever up the gain recognition to offset the excessive losses.

Is it that simple? Can I simply "recognize" gains at year end and voluntarily expose myself to them without actually having converted or sold the underlying asset?

[max88]

I was wrong. You had to actually sell to realize the gain. This has been discussed before on FWF.

viewtopic.php?f=32&t=1518&start=25

I just phoned CCRA. On a loss you have to wait the month, but on a gain you don't have to wait. You do have to sell (or dispose). You cannot just "mark to market."

[joeclarke]

I found this article arising from a court ruling in 2004 that may be helpful in my situation:

The Canadian tax system only allows for the deduction of capital losses against capital gains for such investments as mutual funds, bonds, stocks and other securities. If an investor has no capital gains within the current tax year any capital loss can be carried back three years or forward indefinitely to offset capital gains in those years.

However, it has been common practice to report any such losses within the then current tax year even through they cannot used, as to make them available for carry back or carry forward purposes. "While this is good practical advice" says Jamie Golmbek, CA, CPA, CFP, TEP Vice-President Taxation & Estate Planning at AIM Trimark Investments in Toronto, "it may no longer be necessary based on a Tax Court decision released March, 2004." The Tax Court judge disagreed with Canada Revenue Agency's (CRA's) position that an individual's right to claim a capital loss in subsequent years only exists if the loss has been properly reported in a prior year's tax return.

The judge stated: "it is wrong to say that the loss must have been reported in a return of income for the year in which it was incurred" and that " The income Tax Act imposes no such restriction. It permits a taxpayer to carry various types of losses forward or back. It says nothing about requiring the losses to have been reported in an income tax return."

"Findings in this case will benefit anyone who may have sold a stock at a loss in the past but failed to report the loss at the time, allowing that individual to claim that loss today or in the future, against capital gains" notes Golmbek.

Based on that ruling and subject to a bit more research, I might just withold reporting some losses during 2011 with a view to reporting them in a future year...

[caricole]

I found this article arising from a court ruling in 2004 that may be helpful in my situatio

Based on that ruling and subject to a bit more research, I might just withold reporting some losses during 2011 with a view to reporting them in a future year...

Bravo joeclarke, thats the way to go

My suggestion

For 2011, you report all capital gains and part of your capital losses

For 2012, you report the balance of your capital losses from 2011, I would include a copy of this judgement just to avoid any come back on their part

You can then carryback for the 3 preceding years of your choice or carry forward (automatic if you do not apply for carryback)

my opinion

[DavidR]

... I would include a copy of this judgement just to avoid any come back on their part

That will get their attention all right!

[freedom_2008]

I found this article arising from a court ruling in 2004 that may be helpful in my situation:

The Canadian tax system only allows for the deduction of capital losses against capital gains for such investments as mutual funds, bonds, stocks and other securities. If an investor has no capital gains within the current tax year any capital loss can be carried back three years or forward indefinitely to offset capital gains in those years.

However, it has been common practice to report any such losses within the then current tax year even through they cannot used, as to make them available for carry back or carry forward purposes. "While this is good practical advice" says Jamie Golmbek, CA, CPA, CFP, TEP Vice-President Taxation & Estate Planning at AIM Trimark Investments in Toronto, "it may no longer be necessary based on a Tax Court decision released March, 2004." The Tax Court judge disagreed with Canada Revenue Agency's (CRA's) position that an individual's right to claim a capital loss in subsequent years only exists if the loss has been properly reported in a prior year's tax return.

The judge stated: "it is wrong to say that the loss must have been reported in a return of income for the year in which it was incurred" and that " The income Tax Act imposes no such restriction. It permits a taxpayer to carry various types of losses forward or back. It says nothing about requiring the losses to have been reported in an income tax return."

"Findings in this case will benefit anyone who may have sold a stock at a loss in the past but failed to report the loss at the time, allowing that individual to claim that loss today or in the future, against capital gains" notes Golmbek.

Based on that ruling and subject to a bit more research, I might just withold reporting some losses during 2011 with a view to reporting them in a future year...

Was there a condition in above ruling that " to report any such losses within the then current tax year even through they cannot used"? OP's case is that the losses CAN be used, just not very beneficial tax saving wise, right?

If I was OP, I would consult an accountant, or even contact Mr. Jamie Golmbek, with my special case to be sure. Advice here is free, but the result might be costly.

[AltaRed]

If I was OP, I would consult an accountant, or even contact Mr. Jamie Golmbek, with my special case to be sure. Advice here is free, but the result might be costly.

I suppose it depends on how much is at risk. The opportunity better be a lot of money rather than 'noise' in the overall scheme of things. This could be a penny wise and pound foolish experience if CRA chooses not only to deny it outright, but to 'teach' the OP a lession with an audit.

[joeclarke]

OP's case is that the losses CAN be used, just not very beneficial tax saving wise, right?

If I was OP, I would consult an accountant, or even contact Mr. Jamie Golmbek, with my special case to be sure. Advice here is free, but the result might be costly.

Actually, no - the loss CANNOT be used at all.

I have about $20k in losses that leave me with taxes due of zero whether I use them or not.

$20k in losses which can never be applied against gains does seem unreasonable. The judge in that 2004 case seems to support my position but I don't propose to poke the CRA with a sharp stick on the matter.

[joeclarke]

If I was OP, I would consult an accountant, or even contact Mr. Jamie Golmbek, with my special case to be sure. Advice here is free, but the result might be costly.

I suppose it depends on how much is at risk. The opportunity better be a lot of money rather than 'noise' in the overall scheme of things. This could be a penny wise and pound foolish experience if CRA chooses not only to deny it outright, but to 'teach' the OP a lession with an audit.

The amount "at risk" would probably be in the ball park of $5k (give-or-take) in tax debt. Assuming say, $100k in gains in a year against an opportunity to bring forward a $20k loss from a prior year.

So it ain't no small potatoes, but that cuts both ways. If the CRA were to deny the claim the consequences wouldn't be huge.

[caricole]

joeclarke...So it ain't no small potatoes, but that cuts both ways. If the CRA were to deny the claim the consequences wouldn't be huge

You dont need «PROFESSIONAL» assistance...they are just there to collect their fees, you found the article...the work is done

If you file the oustanding losses of 20k together with the article next year, it should be accepted without problem, if not...an official opposition within 90 days of the descision

Over the years, I have done several...last 2 years, for 50$ +interest each....they reversed their descision without problem, I would not let 50$ on the table because i'am scared

The furthest I ever had to go was an official opposition...(in writing) the arguments where accepted in writing and NO HEARING IN FRONT OF A JUDGE

The assessers are very scared that their descision will be overruled by a judge...careerwise, it does not loock good for them

GO FOR IT

My opinion

[Norbert Schlenker]

It would be extremely unwise to attempt what the OP suggests. The case brought up by caricole is Burleigh v. The Queen and the facts are easily distinguishable from the OP's circumstances. In that case, Burleigh filed a return without declaring a loss and, the next year (and before filing an amended return for the earlier year), filed a return claiming a capital loss carried forward. CRA appealed because the loss had not been declared in a return and the Tax Court decided it wasn't necessary to list it on a return in order to use it. That doesn't mean the Tax Court would agree to move the loss into an entirely different tax year. Indeed, the ruling notes that ...

[Burleigh] reported a capital loss of $3,441,945.87 which gave rise to a net capital loss of $1,720,972.94 available to be claimed in other years.

Note that the capital loss "available to be claimed in other years" is the net figure, not the gross.

Live and learn. It's wise to do some tax planning before December 31st every year.

[Phil D]

On a slightly different but related topic, the one place you do have discretion on applying capital losses is when they are carried back.

If you have paid taxes due to capital gains in previous years and have excess capital losses in the current year you can carry the losses back for a refund of taxes. However, you can choose the amount of losses to carry back. Clearly then, you only carry back enough to bring taxes paid in the previous year to zero, even if that leaves some actual capital gain. In fact you may choose not even to bring the taxes paid down to zero if the marginal value of the losses is very low.

[AltaRed]

Agreed. No point carrying back to the point of dropping oneself in a lower tax bracket (say 15%), when it would be better to carry forward to minimize impacts of higher tax brackets (say 26%).

[patriot1]

On a slightly different but related topic, the one place you do have discretion on applying capital losses is when they are carried back.

You also have discretion in carrying them forward, i.e. if you have a net gain in a particular year you are not obliged to use past net losses against it.

What you don't have discretion in is applying losses against gains in the same year.

[investormom]

On a slightly different but related topic, the one place you do have discretion on applying capital losses is when they are carried back.

You also have discretion in carrying them forward, i.e. if you have a net gain in a particular year you are not obliged to use past net losses against it.

What you don't have discretion in is applying losses against gains in the same year.

I have a related question regarding the discretion for when one should report capital losses. My teenage son has no taxable income from employment but does have an investment account held in trust by us, for which the principal came solely from Child Tax Benefit payments, and hence all gains, income, etc. is taxable in his hands. Since this has been a small amount of money (relative to his basic personal exemption) we have not filed any income tax returns for him to date, although we do receive T3s each year for the account. This year however, the investments incurred capital losses that exceed the capital gains for the year, but he still has no tax payable regardless (no other income). I am wondering if he should file a return to 'log' the net capital loss so that he can carry it forward to some future year when he has enough income that being able to offset any gains that year would reduce his tax payable. I am also thinking that if in intervening years there continue to be small capital gains, we are not obliged to use the past net loss against them, so could continue to carry forward until needed. I guess what I am also looking for is advice on when CRA expects minors to have to file a return.

[DavidR]

I have a related question regarding the discretion for when one should report capital losses. My teenage son has no taxable income from employment but does have an investment account held in trust by us, for which the principal came solely from Child Tax Benefit payments, and hence all gains, income, etc. is taxable in his hands. Since this has been a small amount of money (relative to his basic personal exemption) we have not filed any income tax returns for him to date, although we do receive T3s each year for the account. This year however, the investments incurred capital losses that exceed the capital gains for the year, but he still has no tax payable regardless (no other income). I am wondering if he should file a return to 'log' the net capital loss so that he can carry it forward to some future year when he has enough income that being able to offset any gains that year would reduce his tax payable. I am also thinking that if in intervening years there continue to be small capital gains, we are not obliged to use the past net loss against them, so could continue to carry forward until needed. I guess what I am also looking for is advice on when CRA expects minors to have to file a return.

Welcome to FWF investormom.
1. Yes you should file a return to record the net capital loss in CRA's system.
2. Technically a return should be filed for every year with a Disposition or a realized capital gain. (See the "Do you have to file a return?" section of the General Income Tax and Benefit guide.)
3. You are correct that you are not obliged to use prior year losses against current year gains - save them until he is taxable.

[Shine]

FWIIW - I was surprised to learn this year that only 50% of one's capital loss is allowed to be claimed. After discussions with CRA I kind of understand the concept now but it did surprise me. For reference this is only the second year I have done my own taxes using software- for years I have used the services of a GCA and not really concerned myself with such details.

[stardancer]

FWIIW - I was surprised to learn this year that only 50% of one's capital loss is allowed to be claimed. After discussions with CRA I kind of understand the concept now but it did surprise me. For reference this is only the second year I have done my own taxes using software- for years I have used the services of a GCA and not really concerned myself with such details.

Only 50% of capital gains is taxable, therefore, only 50% of capital losses can be carried back or forward. Keep track of the years in which the losses are incurred and reported, as the politicians change the % amount of capital gains/losses periodically.

[Dejavu]

In my TDW margin I have TDB.911 with a paper loss. Could I, / should I, cystalize this by selling and replacing with e.g. XIN. (capital loss of $2,868)
My wife and I, on our NOA have unused capital losses, off $2,106 and $1,628 respectivley. My understanding is these cumalitve losses can be carried f/wd indefinetly, and this is therefore a recomended strategy.
There will be no penalty or cost to sell but will have to pay $9.99 to buy XIN.
Am I missing anything?,Dejavu.
P.S. TDW order module says the number of shares I need to buy (1180)exceeds the amount for sale" price volatility may occur". Should I use a limit price to control this?
Thx. in advance,D.