Taking an investment loss can lead to a tax refund
Q: Since 2001, I owned several IT stocks listed on the Toronto Stock Exchange. As you can imagine, these shares have declined in value. My losses would approach almost $80,000. If I sold these stocks, can I use the losses to offset against my salaries?
A: Most individuals that continue to hold IT stocks after the meltdown several years ago have experienced tremendous share devaluations.
Some individual stocks have suffered declines of more than 90 per cent of pre-meltdown values. A recent ad from a major investment firm went something like this: “If everyone is talking about it, it is too late to buy.” Many stock analysts feel the same about the price run-ups in the oil sector. So, investors, don’t put all your eggs in one basket.
Generally, an individual may encounter one or all five of the following tax losses during their lifetime: a capital loss, a terminal loss, an Allowable Business Investment Loss (ABIL), a real-estate rental loss or a business loss. Many loss claims may result in tax refunds.
• Capital Loss: One of these arises from the sale of capital property such as individual shares of publicly traded companies, mutual funds and real estate investments. Fifty per cent of the capital loss can be used to reduce capital gains in the year of occurrence and can be carried back three years or forward indefinitely to reduce future capital gains. Therefore, the losses you would incur due to the sale of your stocks would be generally considered a capital loss. Check past tax returns for taxes paid on capital gains you reported in the prior three years and claim a tax refund.
• Terminal Loss: The disposition of real estate investment that includes a building, may incur a terminal loss (not to be confused with the illness, although you may feel that way). This generally occurs when the proceeds for the building portion is lower than both the original cost of the property and the Undepreciated Capital Cost (UCC) of the building. In this instance, the loss can be deducted against other forms of income. These losses can also be carried back and into the future.
• Allowable Business Investment Loss (ABIL): The disposition of shares or debt owed by a small business corporation to an “individual” will generally lead to an Allowable Business Investment Loss (ABIL). Therefore, an individual that owns shares or has made a loan to a small business corporation that has realized a loss on the subsequent disposition can claim these losses on their personal tax return. Their claim is limited to 50 per cent of the loss. However, unlike a capital loss, which can reduce only capital gains, an Allowable Business Loss can be applied against other income (such as employment, interest and business income). You may also carry these losses back three years and forward 10 years for transactions after March 23, 2004. These losses are complex in nature and will require the services of a tax professional.
• Business Losses: Individuals that operate a sole proprietorship (non-incorporated business) or partnership that is “profit motivated” — such as a retail store, a restaurant or IT services — may claim business losses if business expenses are greater than revenues. Operations of the business must be reported on your personal tax return form T21214. Business losses can be applied in the current tax year against other sources of income. Excess losses can be carried back three years and forward for 10 years.
• Real-Estate Rental Losses: Investors that rent a part of or all of a residential or commercial property may incur losses should expenses be greater than rents collected. The carry-back and carry-forward rules are similar to business losses.
Unfortunately, determining the type and amount of loss is not as simple as it sometimes appears. Before acting, individuals should seek advice from their accountant and, in some instances, their lawyer. Claim losses you are entitled to so Mr. Harper’s tax collectors may have to pay you.
Henry Choo Chong, CGA, provides accounting and tax services to individuals and businesses in the GTA. He can be reached at 416-590-1728, ext. 304.