Capital losses can be a very useful tool for all taxpayers in Canada, providing an opportunity to reduce overall tax liability and offset capital gains. Inside this benefits of using capital losses in Canada blog post article, we will discover all the key benefits of using capital losses in Canada, where we focus more on the tax and accounting information that pertains to Canadian laws and regulations.
Introduction on the benefits of using capital losses in Canada.
In Canada, capital losses can be a valuable tool for reducing your tax burden. By offsetting capital gains with capital losses, you can reduce your total taxable income and possibly receive a tax refund from the (CRA) Canada Revenue Agency. Inside these benefits of using capital losses in Canada article, we will explore the key benefits and advantages of using capital losses in Canada and how to take advantage of these tactics to help grow your business.
What are Capital Losses?
Before we go deep into the benefits and advantages of using capital losses in Canada, it’s very important to know the meaning of capital losses and what they are. Capital losses occur when you sell a capital asset for less than its adjusted cost base (ACB). A capital asset can be anything from a stock, software, patents, goodwill, or bond to a piece of real estate. The adjusted cost base (ACB) is the original cost of the asset plus any expenses incurred to acquire or improve it, such as legal fees or renovations.
Capital Losses vs. Non-Capital Losses
It’s also very important to distinguish between non-capital losses and capital losses and know the key differences between these two losses.
Non-capital losses occur when you operate a business or rental property and your expenses exceed your income. These losses can be carried forward and applied against future income from the same source.
On the other hand, capital losses can be applied against any capital gains you may have achieved in the same financial year, or they can also be carried forward to balance your capital gains in future years. It’s very important to keep records of both capital and non-capital losses, as they can have different consequences for your taxes.
Benefits of Using Capital Losses
There are several benefits to using capital losses in Canada. Below are some of the tax benefits of using capital loses:
- Reduce your tax burden: One of the most recognizable benefits of using capital losses is that they can help reduce your overall tax burden and how much tax you pay. For example, when you sell a bond, software or stock that belongs to your business for a loss, you can use the loss you incurred when you sold the bond, software, or stock to offset any capital gains you have achieved in the same financial year. In situations where your losses become more than your gains, you can carry the extra loss forward to future years or move it back to previous years where your losses were less than your gains.
- Increase your after-tax returns: By balancing capital losses with capital gains, you can dramatically increase your after-tax returns in Canada. For instance, if you sell a stock or bond for a $46,580 gain and sell another stock or bond for a $7,640 loss, you can use the loss you incurred when selling the bond to offset or balance the gain you got and reduce your total taxable income. This can result in a bigger after-tax return.
- Preserve your capital: Using capital losses can help preserve your capital by minimizing the tax impact of capital gains. When you are able to sell a capital asset such as a bond or stock for a gain, you will owe taxes on that gain to the Canadian tax authorities. By using the capital losses you incurred previously to offset those capital gains, you can reduce the total amount of tax you owe to the government and keep more of your capital gains.
- Capital loss carry forward: If your capital losses exceed your capital gains in any given year, you can carry the excess loss forward to future years. This capital loss carry forward means that you can use the loss to net against capital gains in future years and potentially reduce your tax burden for several years to come.
- Carry losses back: In some cases, you may be able to carry your capital losses back to previous years. This can be extremely useful if you have realized capital gains in previous years and want to offset them with losses from the current year.
How to Use Capital Losses
Now that you know and understand the key benefits of using capital losses in your business, let’s take a closer and more detailed look at how to use them effectively to improve your business finances.
- Keep track of your adjusted cost base (ACB): To calculate and know your total capital gains or capital losses in a given period of time, you need to know the adjusted costs base (ACB) of your total capital assets. Make sure you keep a record of the actual cost of each asset as well as any other expenses you incur to improve or acquire those assets.
- Use the losses you incurred to offset capital gains you acquired: When you sell a capital asset, such as a bond or stock for a profit, try to offset that gain with a capital loss from another asset you sold previously. This will help lower your overall tax burden and increase your after-tax returns.
- Carry losses forward: If your capital losses exceed your capital gains in a given year, make sure you carry the excess loss forward to future years. This will allow you to use the loss to offset future capital gains and potentially reduce your tax burden for several years.
- Consider carrying losses back: In some cases, it may be beneficial to carry your capital losses back to previous years. This can be exceptionally useful if you have realized capital gains in previous years and want to offset them with losses from the current year.
Conclusion on the benefits of using capital losses in Canada
Using capital losses can be a valuable tool for reducing your tax burden and increasing your after-tax returns in Canada. By offsetting capital gains with capital losses, you can potentially receive a tax refund and preserve more of your capital.
To use capital losses effectively, make sure you monitor your adjusted cost base (ACB), use the losses to offset the gains, and carry losses forward or back as needed.
With careful and strategic planning and execution of your capital losses and capital gains, you can take advantage of this strategy and reduce your tax burden over the long term.