As you know, you are allowed to deduct your realized capital losses against your realized capital gains this year. You can also carry realized capital gains back if you have realized capital losses in one of the previous three years. If you don’t have any capital gains to use your realized capital loss against, you can carry these losses forward indefinitely.
I would like to share another idea with you that may help you to save tax on capital gains as a family. It is possible to transfer capital losses to your spouse or common-law partner. This can make sense if you don’t have any realized capital losses this year, or prior three years, but your spouse does.
Here is an example: Fred and Sally are married with children. Sally owns shares of Inaslump Corp. that she paid $30,000 for, but are worth only $5,000 today, for a $25,000 unrealized capital loss. Sally has no capital gains this year. Fred, on the other hand, had reported a $25,000 capital gain in 2020 on the sale of Flow-Through shares and had paid tax on those gains in 2021. Wouldn’t it be nice if Fred could use Sally’s capital losses?
Here is what could be done, in point form:
A) On May 23, 2021, Fred buys the identical number and type of Inaslump Corp. shares on the open market.
B) Sally sells all her shares of Inaslump Corp. on the open market May 27, 2021 and triggers a $25,000 capital loss.
In this example, I am assuming that the sale and purchase of these shares were done at the same price and there were no commissions.
Here are the results:
- Sally’s $25,000 capital loss is denied. (The superficial loss rules in our tax law will not allow you to claim a capital loss if you or a person affiliated with you acquires identical property within a certain amount of time. This time frame is 30 days prior to, and 30 days after the settlement date).
- Fred paid $5,000 for his Inaslump Corp. shares and the capital loss of $25,000 denied to Sally is now added to Fred’s cost, making his adjusted cost base (ABC) $30,000.
- Fred sells all his shares of Inaslump Corp. on the open market more that 61 days after he purchased them. This is necessary to ensure that the loss is denied to Sally.
- What has been accomplished here is a $25,000 capital loss which Fred can use. His cost base = $5,000 plus $25,000
= $30,000 minus his selling price of $5,000 = $25,000 capital loss. He can use his $25,000 capital loss against future capital gains or carry back the loss against his capital gain realized on the sale of his Flow -Through shares that he sold in 2020. This will create a tax refund for Fred equal to the amount of the tax he paid on the sale of his Flow- Through shares.
One more tip, if you want to use the idea mentioned above or any other, visit your tax professional. You want to know that everything is done right.