Dec. 24 is last day to claim a tax loss

National Post


Dec. 24, 2007 is not only the last day before Christmas to lose money at the malls, it is also the last day to take a tax loss for the 2007 tax year. It typically takes three days for a trade to settle and given the holidays, the third day would be Dec. 31.

Keep in mind that you may not have the whole day since many exchanges such as the TSX close at 1 p.m. (ET) on Christmas Eve.

A capital loss must first be applied against any capital gains in the current year. Remember you can also use the capital loss to offset any capital gains distributions from mutual funds, many of which were distributed this past week.

Once current year capital gains have been used, the balance of the loss may either be carried back to offset capital gains in any of the three prior years (2004, 2005 or 2006) or carried forward indefinitely to offset capital gains in future years.

The procedure to carry back a loss from 2007 to a prior year is straightforward. Next spring, you would simply complete and file CRA Form T1A "Request for Loss Carryback," which is available on the CRA's Web site and included in most tax preparation software packages. On this form you would select the years in which to apply the 2007 capital loss and the CRA will reassess those years' returns and refund any taxes paid on those capital gains.

Still want to hold on to those losers in the hopes of a recovery? There are a couple of strategies you can take advantage of but be sure to execute them properly.

For example, while it might seem like a good idea to sell your investment, realize the loss and then buy it back again, that won't fly with the tax man. The reason for that is the "superficial loss" rule.

A superficial loss occurs when you sell property for a loss and buy it back within 30 days. The rule also applies if your spouse or partner (or a corporation controlled by you or your spouse or partner) buys it back within 30 days.

Should you be caught by the superficial loss rule, your capital loss will be denied and added to your adjusted cost base (tax cost). That means you may realize the benefit of it when you ultimately sell the investment.

One of the most oft-suggested strategies for realizing a loss without actually disposing of the investment is to transfer it to your RRSP either as a contribution (if you have room) or as a swap. Be cautious -- if you simply transfer the investment to your RRSP, the loss will be permanently denied.

Instead, you should consider selling the investment outside your RRSP, realizing the loss and contributing the cash from the sale into your RRSP. Your RRSP can then buy back the investment -- as long as you wait 30 days before buying it back to ensure the superficial loss rule doesn't apply.