Capital gains and losses offer a number of tax advantages for reducing amounts owed on your federal return. Average investors planning for retirement look to retirement savings plans, pensions, and tax-free savings accounts, but there may be situations where claiming capital gains or losses might save you money on investments outside of typical retirement savings vehicles.
“Capital gains and losses refer, in essence, tothe difference between purchase and sale prices for capital properties, as defined by the Canada Revenue Agency,” says Terry Baker, fellow chartered insurance professional with Investors Group in London, Ontario. “When the sale price is higher, you’ve earned a capital gain. When it is lower, you have a capital loss.” The CRA defines capital property as depreciable property that, if sold, would gain or lose money, typically purchased for investment or income purposes. Common types of capital property include second homes, land or equipment used for rental income, and stocks, bonds, or shares.
The capital gains are claimed by completing schedule 3 for the current tax year, to report eligible capital gains from all sources. Once calculated,50% of the totalis transferred to line 12700 of your tax return as yourtaxable capital gainamount.
There are two courses of action you may use in the case of a capital gain to reduce the taxable amount:
- claim a capital gains deduction,
- or declare a capital gains reserve.
Claiming a capital gain deduction: When you sell a qualified small business corporation shares or a qualified farm or fishing property, you will be able to claim capital gain deductions on line 25400. There is a deduction limit based on the type of property you are disposing of.
Claiming a capital gain reserve: When you receive the payment for the sale of over a number of years, you can claim a reserve to allow you to report a portion of the gains every year. In addition to schedule 3, complete formT2017, Summary of Reserves on Dispositions of Capital Property. For example; if you sold property worth $50,000 with an agreement to receive annual payments of $10,000, use form T2017 to calculate your annual capital gain amount.
You must sell the capital property to claim the capital gain.
As the property sits in your portfolio, it is not subject to gains or losses, though it may be active in your tax situation as depreciation or capital cost allowance.
Reporting Capital Losses
Just as with capital gains, capital losses are reported usingschedule 3, andallowable losses may be used to offset gains within the current year, up to three years prior, or carried forwardto future years, depending on the situation.
For example; capital gains on personal property items are earned and reported, but capital losses on these items may not be eligible. Losses are somewhat more restricted than gains, and carrying losses forward requires a calculation of a capital loss adjustment factor, which depends on the carrying year. Despite the additional calculations, sincecapital losses apply directly to offset taxable capital gains, the tax savings may be worth consideration.
Minimizing Tax Using Capital Gains and Losses
Since capital gains and losses come into play only when you dispose of capital property, planning when to sell an item may be strategic. For example; if you plan to sell a stock for a profit near the end of a calendar year, delaying until January defers paying tax on the capital gain until the tax return is due in April, 15 months in the future.
- Since capital losses offset capital gains, if you have an unavoidable loss, you may choose to sell a capital property that results in a gain.
- The loss legally shelters your gain, so you could re-invest both your original investment and the amount it has earned, increasing your cost base on the new investment, reducing the amount of future gains, and therefore also the tax liability.
For example;
Nancy bought 200 shares of stocks 2 years ago. Each share cost $15. Last year she sold 100 of them for $10. This year she sold the other 100 shares for $20. Each time she pays $100 for broker fees to sell and no fees for purchase price:
Calculate gain or loss = Proceeds (sale price) – Adjusted Cost Base (purchase price + purchase fees) – outlays (sale fees)
Last year she had a gain loss of: 100 shares x $10 – 100 x $15 – $100 = -$600 = ($600) loss
This year she has a gain of: 100 shares x $20 – 100 x $15 – $100 = $400 gain
Since last year she didn’t have any capital gains, she will not be able to apply the $600 loss against her income and she will be able to carry it forward. This year, she has a capital gain of $400. So she can use $400 from the previous year’s loss and claim it against her capital gain, so she has no taxable gain left. The remaining $200 loss from last year can still be carried forward.
TurboTax Premier can guide you when reporting your capital gains and losses, especially from an investment or business. Consider if you need further guidance, and get unlimited help and advice as you do your taxes, plus a final review before you file. Or, chooseTurboTax Live Full Service* and have one of our tax experts do your return from start to finish.
*TurboTax Live™ Full Service is not available in Quebec.
References & Resources
FAQs
Some servers may claim 10% of the tips they receive, others may pool their tip claims with their colleagues but in the end Canada Revenue Agency (CRA) takes the stance that any money received while on the job is taxable income.
How much losses can you write off against capital gains? ›
Key Takeaways
You can use capital losses to offset capital gains during a tax year, allowing you to remove some income from your tax return. You can use a capital loss to offset ordinary income up to $3,000 per year If you don't have capital gains to offset the loss.
How does TurboTax calculate capital gains and losses? ›
The calculation for a capital gain or loss is straightforward: it starts with the selling price of your capital asset minus its cost basis (what you originally paid for it). If the number is positive (in other words, you made money on the sale), that's your capital gain.
How much stock losses can you write off Canada? ›
An allowable capital loss is 50% of a capital loss. It can only be used to reduce or eliminate taxable capital gains, except in the year of a taxpayer's death or the immediately preceding year, when it can be used to reduce other income.
How many tips should you claim? ›
The Internal Revenue Code requires employees to report (all cash tips received except for the tips from any month that do not total at least $20) to their employer in a written statement.
Do you have to declare tips on taxes in Canada? ›
In Canada, the amount you earn in tips and gratuities is considered to be income, and you must report all of it on your tax return. How you report your tips and gratuities depends on whether you receive them directly, or through an arrangement with your employer.
Why are my capital losses limited to $3000? ›
The $3,000 loss limit is the amount that can be offset against ordinary income. Above $3,000 is where things can get complicated. The $3,000 loss limit rule can be found in IRC Section 1211(b). For investors with more than $3,000 in capital losses, the remaining amount can't be used toward the current tax year.
Are capital losses 100% deductible? ›
The IRS limits your net loss to $3,000 (for individuals and married filing jointly) or $1,500 (for married filing separately). Any unused capital losses are rolled over to future years. If you exceed the $3,000 threshold for a given year, don't worry.
Can I offset all my capital gains with capital losses? ›
Yes, but there are limits. Losses on your investments are first used to offset capital gains of the same type. So, short-term losses are first deducted against short-term gains, and long-term losses are deducted against long-term gains. Net losses of either type can then be deducted against the other kind of gain.
Can I use more than $3000 capital loss carryover? ›
Capital losses that exceed capital gains in a year may be used to offset capital gains or as a deduction against ordinary income up to $3,000 in any one tax year. Net capital losses in excess of $3,000 can be carried forward indefinitely until the amount is exhausted.
If you copied last year's return over in TurboTax, we automatically include the carryovers. But it's a good idea to keep a written record of your expected carryover amounts to compare against your return. Related Information: How do I enter my capital loss carryover?
Do you pay capital gains after age 65? ›
This means right now, the law doesn't allow for any exemptions based on your age. Whether you're 65 or 95, seniors must pay capital gains tax where it's due. This can be on the sale of real estate or other investments that have increased in value over their original purchase price, which is known as the 'tax basis'.
What is the maximum capital loss in Canada? ›
Taxable capital gains = 50% x capital gains. Allowable capital losses = 50% x capital losses. Net capital losses = the excess of allowable capital losses over taxable capital gains.
How far back can you claim capital losses in Canada? ›
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. You can apply your net capital losses of other years to your taxable capital gains in 2023. Your available losses are shown on your notice of assessment or reassessment for 2022.
How many years can you carry a capital loss forward in Canada? ›
Each year, the accumulated value of your capital losses becomes your net capital losses, which you may carry forward indefinitely. If you have not claimed your net capital losses by the time of your death, your representative can apply them to your final return to offset your capital gains for that year.
How much should I claim in tips for taxes? ›
The law says you should declare or pay tax on all of your tips. The IRS's policy is to only audit restaurants and individuals that declare less than 8%.
What percentage of cash tips should I claim? ›
The law says you should declare or pay tax on all of your tips. The IRS's policy is to only audit restaurants and individuals that declare less than 8%.
What percentage of tips do you claim on taxes? ›
If you receive $20 or more per month in cash tips, report that income to your employer. Your employer will report your tip income on your W-2, Box 7 (Social Security tips). The law assumes an average tip rate of 8%, and it expects employees to report tips at least 8% of the gross food and drink sales.
Is 10% tip okay in Canada? ›
If you received good service, a tip is customary, as it's widely understood that Canadians tip. In sit-down restaurants, “we've always said 15% is the minimum you should consider, and 10% is a bit insulting to the service,” says Lewena Bayer, civility expert and CEO of Civility Experts in Winnipeg.
