How to Carry Back Capital Losses to Claim a Tax Refund

Ask MoneySense

Could you please confirm if I can apply a loss on the sale of investment securities in 2023 to a capital gain on the sale of an investment property in 2022, and claim a refund of part of the capital gains tax paid in 2022?

—Ramesh

Capital loss carry back: How it works

When you complete your tax return, you must combine all capital gains and capital losses from different investments for the year. The result will be either a net capital gain or a net capital loss. If you end the year with a net capital loss, Canadian tax rules provide options that can reduce tax paid in earlier years.

Specifically, if you report a net capital loss on your 2023 return, you can carry that loss back up to three years. That means you can ask the Canada Revenue Agency (CRA) to apply the 2023 loss against capital gains reported in 2022, 2021 or 2020. This process can produce a reassessment of the earlier year and, if applicable, a refund of tax previously paid on those gains.

When should you carry back a capital loss?

You can allocate part or all of a capital loss to one or more of the previous three years. If you had capital gains in multiple years, consider the following points when deciding how to use the loss.

1. Timing: 2023 is the last year in which a loss can be carried back to 2020. From 2024 onward, the oldest year available for carryback moves forward, so the furthest-back year will be 2021.

2. Tax benefit: Applying the loss to the year with the highest taxable income often produces the largest tax refund because the marginal tax rate on capital gains would have been higher in that year.

3. Carryforward alternative: If one or more of the past three years had lower income or lower tax rates, it may make sense to keep the loss and carry it forward indefinitely. Capital losses can be carried forward and used to offset capital gains in future years when your income — and therefore your tax rate — is higher.

Importantly, you are not limited to matching types of assets when using carryback rules. A capital loss from the sale of securities can be used to offset a capital gain from the sale of a rental property or other capital asset in an eligible prior year. In other words, you can apply a 2023 securities loss to a 2022 rental property gain.

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How to carry back a capital loss

To carry back a net capital loss, complete Section III — Net capital loss for carryback — on Form T1A, Request for Loss Carryback. This form is available from the CRA and can be printed, completed and submitted with your tax documents. Most taxpayers submit Form T1A as part of their annual tax filing, either directly or through a tax preparer or accountant.

After the CRA processes your current year return and the T1A request, you will receive a notice of reassessment for the prior year or years to which you applied the loss. If the reassessment reduces the taxable capital gain for that earlier year, you will receive any refund owing as a result of the reduced tax liability.

When do capital gain and loss rules apply?

Capital gain and loss rules typically apply to financial assets such as stocks, bonds, mutual funds and exchange-traded funds (ETFs). They also apply to sales of capital property like rental real estate, businesses, and other capital assets. The principal residence exemption generally excludes gains on a primary residence, so those gains are not subject to the same capital gains treatment.

Any capital gain from the sale of personal-use property must be reported if either the sale price or the adjusted cost base (ACB) exceeded $1,000. Examples of personal-use property include items used primarily for personal enjoyment rather than to earn income.

Restrictions on reporting capital losses

While capital gains on personal-use property—cars, boats, furniture or cottages—are generally taxable, capital losses from selling most personal-use property are not deductible. There are, however, two important exceptions:

1. Listed personal property: Losses on listed personal property may be deductible. This category includes items that tend to appreciate, such as certain works of art, jewellery, rare books, manuscripts, stamps and coins.

2. Bad debts: If you sold personal-use property on credit and the purchaser, who dealt with you at arm’s length, defaulted on the debt, you may be able to claim a bad debt. In that situation the loss can be deductible.

Put simply: you should be able to carry a capital loss from securities in 2023 back to a capital gain on a rental property in 2022, and that could trigger a refund of tax paid in 2022. Whether you should carry the loss back to 2022 or apply it to another prior year—or preserve it to offset future gains—depends on your broader income and tax situation. Consult your tax advisor if you need personalized guidance based on your full financial picture.