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How to Claim Investment Losses on Taxes

There are provisions in law that give you the option to offset the financial burden of different losses when filing your tax returns.  Investment loss tax deduction as envisioned in law allows people to write off losses against parts of their income either moving forward or carrying back to previous years. 

The Canadian Revenue Agency has defined the different categories of losses and laid out the procedure of writing off capital losses, rental losses and business losses. Your income is affected differently depending on the specific type of loss incurred.

Rental Losses

Canadian citizens are mandated to declare all money collected as rental income after renting out a home, part of a home, an apartment, a room in an office or any other types of rental property. 

You can claim loss on investment tax deductible if your advertising, insurance and maintenance expenses outweigh the rental income. An example of how it works is as follows: You can declare a loss of $2,000 after having collected $10,000 in rental income over the course of the tax year against a total spend of $12,000. The loss can be applied against the current year’s earnings and in some instances against the income of the previous year. 

A taxpayer will be required to fill Form T776 – Statement of Real Estate Rentals which clearly provides sections to enter total rent collected and applicable expenses.  The form will, therefore, help you to calculate all your losses. 

Exceptions are given if you have rented out the property to a relative for far less than the prevailing market rent. In such a case, you must not declare the rental income and neither can you claim a rental loss on it. 

For unpaid rent owed to you at the end of a tax year, it can be deducted from your gross rental income. However, you must provide proof that you have been unsuccessful at attempts to collect rent to claim unpaid rent. 

Capital Losses

You are allowed to claim a capital loss when filing your tax if you happen to sell capital property such as securities, land, jewelry, or any other capital asset at a loss. The capital loss on all these assets will only be applied against capital gains from similar categories. Where there’s no capital gain in the current tax year, you are able to carry the capital loss back as far as 3 years to the year a gain was recorded and can be carried forward indefinitely in anticipation of capital gains. 

A taxpayer has to complete Schedule 3 of their tax return and then transfer the amount to line 12700 of their Income Tax and Benefit Return to claim capital losses. The calculation of capital loss is not complicated. It is as straightforward as taking the proceeds of the disposition (amount received) and subtracting the property’s adjusted cost base as well as any expenses incurred when selling it. A property’s adjusted cost base refers to the cost paid for the property plus any legal fees, commissions paid, and other expenses you incurred when purchasing it. Therefore, if a capital asset sold at $100,000 with an adjusted cost base of $110,000 and advertising expenses of $500 to make the sale, then the capital loss will total to $10,500. 

How to claim investment losses on taxes? You cannot claim the entire amount as capital loss for the tax year. The CRA will every year set an inclusion rate which is essentially an outline of how much of your capital gains or losses can be reported for the tax year. The current inclusion rate is one-half (1/2) which therefore means that you can only claim $5,250 in capital losses from the loss of $10,500 calculated above. Visit wealthinsurance.com/services/investments.html to learn more on how you can use life insurance as an investment.

For transactions undertaken using foreign currency, the same formula will be used to calculate your capital loss for the year. However, the regulations do not allow you to calculate the amount of capital loss you can claim and finish by converting it into Canadian dollars. The proper procedure is to convert each value of the formula into Canadian dollars using the exchange rate on the day of the particular transaction to arrive at your capital loss. 

Where the capital loss exceeds your capital gains for the tax year, you are allowed to carry the capital loss back to one of the three previous years where capital gains were made. Fill out Form T1A – Request for Loss Carryback to apply for a carryback with your tax return. Keep in mind that you must not file amended returns for the previous year(s) to which you want to apply the extra capital loss.

Business Losses

Business losses are also referred to as allowable business investment losses (ABIL). Losses incurred from unpaid debts, sale of shares from a small business, or any other qualified investment property will have to be declared as ABIL rather than as capital losses. Neither of the above named items need to have been given/sold for cash. In fact, it is possible to claim a business loss even after disposing of these items for nothing. For debt to qualify as a business investment loss, it must be confirmed as bad or unrecoverable come the end of the tax year. Additionally, when claiming a business investment loss for shares, the small business must have been declared bankrupt, become insolvent, is in the process of winding up, or is passed to have no fair market value.

Investment loss tax deduction is calculated by filling out Chart 6 of the T4037 – Capital Gains form, and thereafter reporting the business loss on line 21699 and line 21700. Total ABIL goes to line 21699 whereas the allowable portion of the loss to claim based on your income is reported on line 21700.

Allowable business investment loss can be applied to your other sources of income unlike the case for capital losses. Where the business loss exceeds all your other income, the difference is usually carried forward up to ten years or back to the precious three years as non-capital loss. After the tenth year, any unused ABIL is converted into net capital losses that can be carried forward indefinitely, but can only be claimed against capital gains.