Make Those Capital Losses Pay
David Christianson, CFP, R.F.P., TEP
Finished your tax return yet?
If you owe tax and file late, you face an immediate penalty of 5% of the tax owing (doubling to 10% if you are a repeat offender) and an additional 1% (2% for repeaters) for each month your return is late.
As well, I maintain that late filers are faced with more scrutiny and question about income and deductions. If some of your slips have still not been received, file without them and then send in a T1-Adjustment form later.
The filing deadline is extended to June 15 for people who are self-employed, but any taxes owing must still be paid by April 30. (I know that doesn’t make a lot of sense, but there you are.)
Whether you have filed or not, here is something to look into, in view of the calamitous stock, bonds and real estate markets of 2008.
Net Capital Losses
If you have net capital losses for the year on your non-registered investments, you may have an opportunity to recover taxes you paid in any of the last three taxation years.
Capital gains and losses arise when you sell capital property – real estate, stocks, bonds and mutual funds are the most common examples. Capital losses can only be claimed against capital gains, not regular income. Therefore, if you have net losses for the year, they carry forward indefinitely, to be used against future capital gains.
However, if you reported gains and paid tax on them in any of 2007, 2006 or 2005, then you can carry your current year losses back to any of those years and “undo” the gains and the tax you paid.
Remember that you must have sold something to realize the loss – this does not apply to investments you still own, even if they have declined in value. This also does not apply to assets inside of RRSPs, RRIFs or other registered plans.
As an example, let’s say you had $10,000 of realized capital losses in 2008 from non-registered investments you sold. Half of this loss is reported on your tax return, giving you net losses of $5,000 for the year. You had no realized gains in 2008 to offset.
Good news, though – in 2005 you paid tax on net gains of $4,000 and in 2006 you paid tax on net gains of $3,000.
You will now file a T1-A Request for Loss Carryback form to get this tax back. Be sure to use Section III – Net capital loss for carryback, which asks you which amounts of loss to apply to each year. You will put $4,000 on line 6636, to apply to 2005. You want to scoop up all of the 2005 gains now, as this is your last chance, due to the three-year limitation
On line 6637 for 2006, you will claim the remaining $1,000 of losses, thus putting the entire amount to work.
If you have net losses again in 2009, you can go through the same process next year and carry them back to 2006 and offset more of those gains.
This example would result in a tax refund, made especially sweet because it is recovery of tax paid a few years ago and considered gone for good.
Happy harvesting!
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David Christianson is a fee-only financial planner and investment counsel with Wellington West Total Wealth Management Inc. His column, ‘Dollars & Sense’ appears Fridays in the Winnipeg Free Press.