Capital Loss Planning
New Capital Loss Considerations
The federal government’s 2024 proposed changes to the capital gains inclusion rate (CGIR) have introduced new complexity into the year-end ritual of harvesting capital losses. Although the CGIR changes have yet to be passed into law, the Canada Revenue Agency confirmed it will administer the CGIR proposals. Impacted forms are expected to be available on Canada.ca as of January 31, 2025.
For the 2024 transition year, all taxpayers (individuals, trusts, and corporations) must divide their realized capital gains and losses into two periods:
- Period 1 for pre-June 25, 2024 dispositions (P1)
- Period 2 for post-June June 24, 2024 dispositions (P2)
Capital gains and losses within each period are netted against each other to arrive at a net gain or loss for each period. The mix of capital gains and losses for each period will determine the taxpayer’s inclusion rate for the transitional taxation year that straddles June 25, 2024. Note that the first two scenarios will create a blended rate for the year.
| Taxpayer Scenario | Inclusion Rate |
|---|---|
| Only net capital gains in P1 and P2 | (1/2 x P1 + 2/3 x P2) ÷ (P1 + P2) |
| Only net capital losses in P1 and P2 | (1/2 x P1 + 2/3 x P2) ÷ (P1 + P2) |
| P1 net capital gains exceed P2 net capital losses | 1/2 |
| P1 net capital losses exceed P2 net capital gains | 1/2 |
| P2 net capital gains exceed P1 net capital losses | 2/3 |
| P2 net capital losses exceed P1 net capital gains | 2/3 |
| P1 and P2 net capital gains and losses are nil | 2/3 |
Tax Tips:
- Based on the unusual transition inclusion rates above, consider realizing losses in future years instead of the 2024 straddle year to offset capital gains expected to be subject to the 2/3 inclusion rate.
- Realize capital losses in tax years when capital gains in future years exceed $250,000 for individuals, graduated rate estates (GRE), and qualified disability trusts (QDT).
Capital Loss Carry Backs and Carry Forwards
When capital losses exceed capital gains for the tax year, a net capital loss is the result. A taxpayer may carry back net capital losses for a particular tax year to reduce net capital gains in any of the prior three tax years. The taxpayer may also carry forward the net capital loss indefinitely to reduce net capital gains realized in future tax years.
The proposed rules will continue to allow for adjustments to the capital loss inclusion rates so that when the capital loss is applied to a tax year with a different inclusion rate, the gross amounts effectively offset each other.
When an individual, GRE, or QDT has multiple capital gains inclusion rates for a particular year because they have exceeded the $250,000 annual threshold, net capital losses from previous years applied in the current year are applied first to capital gains subject to the higher inclusion rate.
Tax Tips:
- Claim capital losses carried forward in future years when the 2/3 inclusion rate applies instead of carrying back losses to the 1/2 inclusion years.
- Consider accumulating capital losses for a deceased individual’s terminal tax return to offset capital gains from the deemed disposition at death, especially if the capital gains are expected to exceed $250,000.
- Unused capital losses in year of death may be applied against other taxable income, not just capital gains.
- Due to the unequal offset of capital losses (50%) against capital gains (100%) for alternative minimum tax calculations, individual taxpayers subject to AMT should use extra caution when realizing capital losses for the purpose of carrying forward the claim.
Foreign Currency Translations
Remember to consider foreign exchange rates when estimating capital gains for the year. A large gain within a U.S. dollar account could end up as a loss in Canadian dollars (or vice versa) when the purchase and sale values are translated at their respective spot rates.
Superficial Loss Rules
A taxpayer cannot simply sell and repurchase the same securities to realize a deductible capital loss. The tax rules will treat the transaction as a superficial loss to suspend the loss claim, if the taxpayer or their spouse acquires an identical security within 30 days before or after the sale and they still own the security at the end of that period. This rule includes repurchases inside RRSP, RRIF, and TFSA accounts, as well as repurchases by a corporation controlled by the taxpayer or their spouse. The current holder of the repurchased security must add the suspended loss to their adjusted cost basis (ACB). Taxpayers should also avoid contributing loss securities in-kind to their RRSP or TFSA because the loss is denied at the time of contribution or eventual disposition inside the plan.
Taxpayers can use the superficial loss rules to transfer a capital loss to their spouse. For example, if X already has capital losses for the year or a loss carry forward balance, they can sell the asset on the market and co-ordinate with Y, their "non-loss/high capital gain" spouse to buy the security on the market within 30 days of X’s sale date. Y receives the higher cost basis for tax purposes because Y must add X’s suspended loss to their own ACB. Y can then realize the suspended loss when Y sells it on the market at least 30 days after X sold the stock.
Canadian Private Corporations
Shareholders of Canadian private corporations should speak to their corporate tax accountant before their corporation disposes securities to realize a capital loss. There could be a plan to pay out a capital dividend and any capital losses will create an unexpected reduction in the capital dividend account (CDA) balance. The CDA balance is measured at a point in time, not from fiscal year to fiscal year. Capital dividends paid out in excess of the capital dividend balance are subject to a 60% penalty.
The latest proposals confirm that the additions and subtractions to the CDA will be based on separate Period 1 and Period 2 inclusion rates during the transition year. In other words, the blended capital gains inclusion rate for the year will not apply to the calculation of the CDA balance. For example, a corporation that realizes a $100 capital gain before June 25, 2024 can distribute $50 of tax-free capital dividends, even if it elects to do so after June 25, 2024.
Cut-Off Date
For an individual taxpayer to apply a capital loss against capital gains realized in the 2024 tax year, the trade must settle on or before December 31, 2024. U.S. tax returns and 1099-B reporting uses the trade date as the inclusion date for the year-end cut-off, not the settlement date. U.S. citizens should keep that in mind to avoid a mismatch of gains or losses between the Canadian and U.S. tax return years.
For Canadian and U.S. markets, the last 2024 trade date is December 30, 2024, for settlement on December 31, 2024.
Speak to your Raymond James financial/investment advisor to discuss your capital loss planning strategies.
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