[Thanks to Robert A. Smith, CFA, CFP, a Financial Advisor in Markham area and author of Dollars From Change (Review), for suggesting today’s topic and providing most of the content in the post.]
If you have a net capital loss for the 2008 tax year (who doesn’t?) and reported taxable capital gains in 2005, 2006 or 2007, you can use the capital loss to reduce the taxable income for the previous year(s). It is relatively straightforward to do so: fill out Section III – Net capital loss for carryback in Form T1A Request for Loss Carryback in your paper return or your favourite tax software and file it along with your 2008 tax return. The Canada Revenue Agency will automatically reassess the prior year returns, typically within a week or two of assessing your current year’s return.
Let’s consider an example. You have net capital losses of $3,000 for the 2008 tax year and you want to carry it back to a previous year. You pull out your 2005 return and find that you reported capital gains of $1,200 in Line 127. However, you also offset $300 of that year’s capital gains with losses incurred prior to 2005 in Line 253. You should take the difference between Line 127 and Line 253 ($900 in our example) and report it in Line 6636 of Form T1A. Now, you have $2,100 left to carry over to tax years 2006 and 2007. Rinse and repeat this step.
There are a couple of things to watch out for:
First, carryback the loss to the earliest year possible (which would be 2005 for the 2008 tax year). Then, if you still have losses left, carry it to the next two years.
Make sure that taxes were payable in the preceding year(s) by checking Line 435. As you can only get a refund on taxes paid, there is no sense in carrying back a capital loss to a year when no taxes were payable. If you are unable to carryback the loss for any of the preceding three years, you can carry forward the capital loss for possible future use.