Highlights:

• Lost money on an investment? You might be able to turn it into a tax break
• Even if the loss was years ago, it’s probably still claimable
• When this strategy works, when it doesn’t, and the steps to save on taxes

Nobody likes losing money on an investment.

The good news is that if this happens in a non-registered account, it can help lower your taxes.

Even if you’re focused on registered accounts, this may still be relevant to you - especially if you purchase shares through an employee stock purchase plan.

Here’s how it works, and what to keep in mind.

Here are some examples

Investing in a non-registered account

Mike invested in a tech company thinking it had big potential. He paid $5,000 for 100 shares.

But it didn’t take off the way it had hoped, and he watched the share price continue to fall. With no sign of recovery, he decided to sell.

He got just $2,000 back - and had a capital loss of $3,000.

No one wants to sell at a loss - but it’s not all bad news

Investing through an employee stock purchase plan

This is the most common way I’ve seen people in their ‘wealth-building era’ get claimable losses.

Say the company you work for has a program where employees can purchase stocks at a discounted price. They might even match a percentage of your stock purchases, making an even sweeter deal.

These stocks are typically purchased directly from your company through payroll deductions.

They are often held outside of registered accounts, so they are subject to tax when you sell.

Jasmine took part in her company’s Employee Stock Purchase Plan (ESPP)

She held onto these stocks even after she left the company.

However, a few years later the company was found guilty of fraud - and the stock price tanked.

She held onto it for years, but it never recovered. She finally sold at a $10,000 loss.

Use losses to offset gains

Let’s go back to Mike’s example and see how his $3,000 capital loss can reduce his tax bill.

Later in the same year, Mike sold another investment and made a $7,000 capital gain.

Since this was in a non-registered account, he’d be taxed on half of that.

But thanks to the $3,000 loss from the tech stock, Mike can offset part of the gain:

• His net capital gain drops from $7,000 to $4,000

• Only 50% of that ($2,000) is taxable

In other words, that $3,000 loss saved him from paying tax on an additional $1,500 worth of income. Not bad for a disappointing investment!

Alternatively, if he had capital gains in any of the past 3 tax years, he could apply this loss to those gains and receive a tax refund.

Saving money on taxes feels good!

But what if you don’t have other investments in non-registered accounts?

If you don’t have any other gains to offset right now, don’t worry - your capital loss doesn’t go to waste.

In Canada, capital losses can be carried forward indefinitely. This means you can use a loss to offset a gain even years down the road.

It’s like having a tax-saving coupon to use whenever you need it.

For example, Jasmine will start investing outside of her TFSA and RRSP accounts in 5 years.

When she eventually sells in her non-registered accounts and makes a profit, she can apply that $10,000 loss to reduce her taxable income.

Not all losses count

You can only claim losses from non-registered accounts, but that’s not all.

If you sell an investment at a loss and then buy it back within 30 days (or your spouse does), the CRA will deny the loss. This is called a superficial loss.

Make sure you’re not buying the same or an identical investment too soon, or the loss won’t be accepted.

The practical steps

You’ve sold an investment at a loss in a taxable account. Here’s what to do next.

Report the loss on your tax return

When you file your taxes for the year, report the sale on Schedule 3 - Capital Gains (or Losses).

Include the date of purchase, date of sale, what you sold it for, and the adjusted cost base (what you paid for it, including any fees).

The loss will then be calculated and carried to line 12700 on your tax return.

Track your unused losses

If you don’t have gains to offset this year, the CRA automatically tracks your net capital loss for future use.

You can find your total loss carryforward balance in your CRA My Account under "Carryover amounts" or in your most recent Notice of Assessment.

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