Unless you're caught up in some bizarre tax shelter, nobody sets out to experience losses. The good news, at least from a tax perspective, is that you can often get the tax man to share in your losses by refunding tax you paid on income or gains, depending on the type and timing of your loss.
Capital losses may only be applied against capital gains, while non-capital losses can be claimed against all sources of income.
A capital loss occurs when you sell capital property, such as a stock, bond or non-personal real estate, at a loss.
A non-capital loss is a loss typically realized from employment or operating a business. Generally, capital or non-capital losses can be carried back up to three tax years, but both capital and non-capital losses must first be used against the current year's gains or income.
The amount of refund you'll get depends on your marginal tax rate in the year in which you are carrying back the loss -- not on your tax rate in the year the loss arose. If your income has been rising steadily, your tax refund may be lower than you expected.
Taxpayers who still have excess losses beyond their gains or income in the current and three prior years can carry forward their capital losses indefinitely and their non-capital losses for 20 years.
To carry a loss back to a prior year, you simply complete Form T1A and include it with your tax return for the year in which the loss arose and wait for your refund to be processed.
At least that's how it's supposed to work. Some taxpayers who filed loss carry-back requests for 2009, however, may have to wait a bit longer this year to get their refunds if they were caught up in a Canada Revenue Agency system glitch.
On May 10, the CRA identified a system error that resulted in "nil" reassessments for loss carry-back situations, meaning that loss carry-back requests did not result in the expected refund(s) for the prior year(s).
CRA spokesman Philippe Brideau confirmed that approximately 40,000 taxpayers have received a Notice of Reassessment for prior years that "may not have accurately reflected" their requests for a loss carry-back. The original system problem was quickly corrected such that no further erroneous reassessments were issued.
If this sounds like you, the good news is that you don't need to contact the CRA nor do you need to re-submit your T1A loss carry-back request.
"Measures are being taken, on a priority basis, to rectify the situation," Mr. Brideau said in an email. "The CRA is building a process that will automate the re-processing of all the affected accounts and new notices of reassessment will be issued."
The CRA expects that nearly all affected taxpayers will receive their corrected notices of reassessment by mid-September, along with the resulting refunds to which they are entitled.