Capital Loss

Losses offset gains, not your paycheque

A capital loss is the mirror image of a capital gain: you sell an asset for less than its adjusted cost base plus selling costs. What makes it valuable is that a realized loss reduces the tax on realized gains. What limits it is just as important: capital losses can only offset capital gains. They cannot reduce salary, interest, business income or any other ordinary income, no matter how large the loss.

The system is symmetric on purpose. Just as only half of a gain is taxable under the capital gains inclusion rate, only half of a loss is deductible: this half is called the allowable capital loss, and it offsets taxable capital gains dollar for dollar. In practice you can simply think in full amounts, a $10,000 loss cancels a $10,000 gain, because both sides are halved by the same fraction.

The three directions a loss can travel

An allowable capital loss follows a fixed roadmap, in this order:

• First, this year. The loss must be applied against any taxable capital gains you realized in the same year. This part is automatic; you cannot save the loss for later if there are gains to absorb it now.
• Then, back up to 3 years. Whatever remains becomes a net capital loss you can carry back against gains from any of the three previous years by filing form T1A with your return. The CRA reassesses the old year and refunds tax you already paid, real money back, not just a future credit.
• Then, forward forever. Any loss still unused carries forward indefinitely against future capital gains. It never expires while you are alive, so a bad year in your thirties can still be trimming tax bills in your seventies.

Even death is not quite the end of the road

Net capital losses die with you only in the loosest sense. On the final tax return, and generally the year before it, remaining losses can be applied against any income, not just gains, one of the very few times the capital loss wall comes down. Losses you carry are a quiet asset with a long shelf life.

The trap, and the strategy built around it

One rule polices all of this: sell at a loss and buy the identical investment back within 30 days on either side of the sale (whether you, your spouse or your registered accounts do the buying) and the loss is denied under the superficial loss rule; that entry covers the 61-day window and its edge cases. Investors who realize losses deliberately, while staying invested through a similar but not identical fund, are practising tax-loss harvesting, the strategic version of everything on this page.

In a TFSA or RRSP, a loss is just a loss

None of the machinery above exists inside registered accounts. Lose $10,000 on a stock in your TFSA or RRSP and there is nothing to claim, nothing to carry anywhere: the money is simply gone, with no tax value at all. The same accounts that make gains tax-free or tax-deferred make losses invisible.

The TFSA adds a second sting: contribution room is created by contributions and restored by withdrawals at their actual value, so money lost inside a TFSA also shrinks the tax-sheltered space you can ever rebuild. A speculative bet that goes to zero in a TFSA takes its contribution room down with it, permanently. This asymmetry is a real argument for keeping the most speculative positions, if you hold any, where a loss at least produces a deduction.