Under our tax system, capital losses from the sale of stocks, bonds, mutual
funds or other securities can only be deducted against capital gains. If an
investor had no capital gains in the current year, these losses can be carried
back three years or carried forward indefinitely to offset capital gains in
those years.
As Canadians begin filing their returns this month, most tax advisors remind
their clients to report all capital losses they realized during the year even
though they cannot use them currently, so as to make them available for
carryback or carryforward purposes. While this is good, practical advice, it may
no longer be necessary based on a Tax Court decision released earlier this
month.
The case (Burleigh et al v. The Queen) involved two taxpayers who tried to
carry forward capital losses from 2001 to 2002.
The Canada Revenue Agency (CRA) maintained that the taxpayers had no right to
claim a capital loss carryforward in their 2002 returns because when they filed
their returns for 2002, they still had not yet filed their 2001 returns
reporting the loss they were now trying to use. The CRA argued an individual's
right to claim a capital loss in a subsequent year only exists if the loss has
been properly reported in the prior year's tax return.
The Tax Court judge vehemently disagreed with CRA's position. The judge
stated: "It is wrong to say that the loss must have been reported in a return of
income for the year in which it was incurred.
"The Income Tax Act imposes no such restriction. It permits a taxpayer to
carry various types of losses forward or back. It says nothing about requiring
the losses to have been reported in an income tax return."
The judge also commented that an individual, unlike a corporation, is not
required to file an income tax return if he or she is not taxable. That does not
mean a loss realized in a particular year does not exist.
"Losses that are available for carryforward ... like income, have an
existence that is independent of their being reported in a return of income. The
taxpayer's right to utilize such losses is not subject to the restrictions which
the (CRA) would impose on them. I am not prepared to read into the Income Tax
Act words that are not there."
The finding in this case will benefit anyone who may have sold a stock at a
loss in the past but failed to report the loss at the time, allowing that
individual to claim that loss today or in the future, against capital gains.