Not every business or investment decision you make will turn out to be a winner. That doesn’t mean you can’t salvage some value from your losses. Understanding what losses are available and how to use them will allow you to make the most out of a bad situation. Remember the Canada Revenue Agency (CRA) takes their share when you have gains, why shouldn’t you be able to benefit from your losses.There are several types of losses with each having their own rules. Let’s take a look at some of the common losses you may have heard of.
CAPITAL LOSSESA capital loss arises when you sell a capital asset at an amount less than what you originally paid for it. Capital losses include investments such as bonds and stocks and other items that have a long lasting nature. This doesn’t include the sale of products or inventory as part of your regular business at a loss.
Capital losses are restrictive in nature. You can only claim 50 per cent of the capital loss for tax purposes and they can only be claimed against a capital gain and not other sources such as employment, rental or dividend income. In some cases, you can run into a situation where you have a large capital loss, but cannot use it to reduce your taxes because you have no capital gains to apply it against. Fortunately, in these situations, you can either carry forward the loss indefinitely until you have a capital gain to offset it against or claim it against capital gains reported in the past three years.
You also cannot claim a capital loss on depreciable properties. This would include real estate, vehicles and equipment. For example, if you sell a rental property at a loss of $100,000, you won’t be able to claim a capital loss on the building portion.
Finally, towards the end of the tax year, many advisors will encourage you to sell stocks which are in a loss position to offset any capital gains you had during that same year. This strategy can help you by eliminating taxes that would have otherwise been payable. However, keep in mind for those stocks which you would like to buy back, there is a special rule which prevents you (or your spouse) from buying the same stock back within 30 days of the sale. For example, on December 15th, you sell stock X for a loss of $100 in order to claim a capital loss. You still believe it will appreciate in value over time and so you buy stock X again on January 3rd of the next year. Special superficial loss rules disallows you from claiming that capital loss since you purchased it within 30 days of selling it at a loss. You end up with no tax savings, additional transactions costs to sell and purchase the stock and your portfolio is in the same position as it was before. In this example, if you purchased the stock before November 15, 2015 or after January 15, 2016, you would be able to claim the capital loss.
NON-CAPITAL LOSSESA non-capital loss includes losses from business, employment or rental property. For example, if you are opening a dental practice, you may have a loss for the first two years during the initial start-up phase. Non-capital losses are less restrictive. They are 100 per cent deductible and can be claimed against other sources of income. They can also be carried back three years and carried forward up to 20 years to offset past and future income.
ALLOWABLE BUSINESS INVESTMENT LOSS (ABIL)An ABIL is a special type of capital loss which has hybrid qualities of both capital and non-capital losses. Similar to a regular capital loss, only 50 per cent of an ABIL can be claimed. The difference however is that an ABIL can be used against other sources of income similar to a non-capital loss.
Just like capital losses, ABIL’s arise when you sell shares or loans/bonds for less than you originally paid. The key difference is that the shares and or loans/bonds being sold must be that of a small business corporation. Small business corporations are Canadian controlled private corporations in which at least 90 per cent of the assets are used in an active business in Canada. In other words, the corporation cannot be an investment or a rental company.
As an example, perhaps your friend proposes an investment opportunity for you to either buy shares of his corporation or loan money to it which is currently building a ski resort. After five years of warm winters, the ski resort has had to close down and the money you invested is nowhere to be seen. In this scenario 50 per cent of the money you put in could be claimed as an ABIL and offset against your taxable income.
TIPS ON LOSSESWait at least 30 days before buying an investment back which was sold at a loss.
If you have a large capital gain in the year, consider selling other investments that are in a loss position to reduce your taxes.Carry back your losses to get a refund for a previous year. This puts money in your pocket immediately.
If you have invested or loaned money to another small business and are not expecting to get anything back, speak to your accountant about claiming an ABIL.
No one likes to make bad investments, but you don’t have to take on the entire burden yourself. In some cases, you may get back up to 50 per cent of your loss in tax savings. Thisallows you to make the most out of a bad situation.
This article was prepared by David Chong Yen, CPA, CA, CFP and Louise Wong, CPA, CA, TEP of DCY Professional Corporation Chartered Accountants who are tax specialists and have been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail email@example.com / firstname.lastname@example.org. Visit our website at www.dcy.ca. This article is intended to present tax saving and planning ideas, and is not intended to replace professional advice.