# Convert Capital losses to Non-capital losses?



## Pliskin (Jul 17, 2017)

Here's a "Hypothetical" scenario that I'd appreciate opinions on:

A. Individual has a substantial amount of Capital Losses being carried forward from previous years.

B.The person was not working for a year and had only about $1000 in income from investments and dividends, plus $5000 in capital gains, so about $6000 in Total Income (Line 150).
The person has carrying charges of about $6000 (Line 221).
Net Income is zero (Line 236).
No tax was paid, so on the surface, it makes no sense to apply the capital losses from previous years to the gains.

C. Nevertheless, let's apply $5000 in previous capital losses to bring the gains to zero.
The Net Income is still zero.
However, the T1A now shows a balance of non-capital loss available for carryforward of $5000.

D. The person subsequently returns to work and has an income amount such that some is being taxed at the highest marginal rate.
The person has no capital gains.
The person applies the non-capital loss being carried forward (Line 252).
This has the effect of reducing taxes from the highest marginal rate.

Seems to me this ought not be acceptable. Does the CRA have some sort of exclusion on this type of transaction?


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## AltaRed (Jun 8, 2009)

You don't have to apply Carry Forward capital losses to any forward year capital gains. Don't use any of those losses in B (and C). You cannot use them in D either if there are no capital gains in D. Capital losses can only be applied against capital gains in forward years.

You cannot apply cross mingle captial losses and non-capital losses.

Added: I have no idea how someone could incur carrying charges of $6000 in B. That said, you cannot have a negative tax credit, i.e. the non-capital losses in B are of no value to the taxpayer.


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## Pliskin (Jul 17, 2017)

AltaRed said:


> Added: I have no idea how someone could incur carrying charges of $6000 in B. That said, you cannot have a negative tax credit, i.e. the non-capital losses in B are of no value to the taxpayer.


Line B is mostly carrying charges (interest on an investment loan, in this example).
Also of note is that there are no prospects of having a future capital gain against which to apply the existing capital losses of previous years. The stocks held in the investment loan are hopeless.

I'm looking at the T1A, Part 1, Non-capital loss for carryback.
There is a line for Net capital losses from other years (line 252).
By wiping out the capital gains incurred in the year of unemployment, the total losses (line B) exceed the total income (Line A).
There is no farming income/loss.
So, the result of Line F minus line G is an amount described on the form as "Balance of non-capital loss for carryforward".

We're not trying to apply capital losses as non-capital losses.
If we can morph the capital losses into non-capital losses, then at least a portion of the old capital losses ultimately get used, in a fashion, against employment income.
I've tried this in the tax software several times, and it keeps looking do-able.


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## Eclectic12 (Oct 20, 2010)

Pliskin said:


> ... Seems to me this ought not be acceptable. [Using Capital Loss plus carrying charges to create a non-capital loss for future use.]
> Does the CRA have some sort of exclusion on this type of transaction?


Nothing I am finding ... TaxTips.ca says


> Where the interest expense exceeds the income from the investment, the interest expense will *normally still be tax deductible*.


This implies that there are cases where the interest expense being too large makes disqualifies it from being tax deductible.



> If the interest expense exceeds all other income for the year, this becomes a non-capital loss, which can be carried back to previous tax years, or forward to future tax years.


http://www.taxtips.ca/personaltax/investing/interestexpense.htm


It seems the main difference between the non-capital loss use and a capital loss is that the non-capital loss has an expiry date (20 years for taxation years ending after 2005) where the capital loss has no expiry.

http://www.taxtips.ca/glossary/noncapitalloss.htm




AltaRed said:


> ... Capital losses can only be applied against capital gains in forward years.


Mostly correct ... the capital loss has to be recorded in the year it happened. The use is first against capital gains in the same tax year. Where the capital loss exceeds the capital gain, one can apply to have the capital loss applied up to three tax years previously to the year it happened or to future years.
https://www.canada.ca/en/revenue-ag.../line-253-net-capital-losses-other-years.html




AltaRed said:


> ... Added: I have no idea how someone could incur carrying charges of $6000 in B.


My guess would be a disappearing source where the interest cost is still being charged despite the bulk of the investment/income paid being drastically reduced, as per the "Disappearing Source Rules" section in the TaxTips article.


Cheers


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## AltaRed (Jun 8, 2009)

Eclectic12 said:


> Mostly correct ... the capital loss has to be recorded in the year it happened. The use is first against capital gains in the same tax year. Where the capital loss exceeds the capital gain, one can apply to have the capital loss applied up to three tax years previously to the year it happened or to future years.
> https://www.canada.ca/en/revenue-ag.../line-253-net-capital-losses-other-years.html


Indeed, your response is the more complete answer. I used the 'short cut' language I did since the OP said there was no capital gains that year and made no mention of any prior capital gains in any previous years. I've taken advantage of that opportunity at least a few times in the past when I had a significant capital loss in a particular year, e.g. 2015, when I did swaps in my fixed reset prefs to crystallize the loss purposely to offset I had some large cap gains in 2013.

ISTM the OP is trying to inter-use capital and non-capital losses and that is not doable. They are 'separate' accounts so to speak.


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## Eclectic12 (Oct 20, 2010)

I must need another coffee or something but I am confused ... I don't see where there is mingling or inter-using of capital and non-capital losses.

Based on "capital losses carried forward", "total income" and the tax return line numbers, it reads to me that the carried forward capital loss is used in one tax year where the combination of using the capital loss and the strangely high carrying cost results in a non-capital loss. 

In a future tax year when say employment income is in play at a high level, the non-capital loss that carried forward for up to twenty years is deducted against income.

Using the two losses in different tax years means they are not cross mingled, does it not?
What am I missing?


Cheers


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## AltaRed (Jun 8, 2009)

You are not missing anything wrt the discussion we've had on each of capital vs non-capital losses, but the title of the thread says "Convert Capital Losses to Non-Capital Losses". What I am saying is that the OP can't mix these up.


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## Pliskin (Jul 17, 2017)

Agreed, capital losses can't be applied directly as non-capital losses.
Eclectic12 seems to follow my thinking. By applying the capital losses to reduce the capital gains noted in my original post in item B, we end creating non-capital losses.
I'm using Turbotax software.
Mods are still delaying my posts, or the reply would have shown up earlier.


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## Pliskin (Jul 17, 2017)

The carrying charges stem from an investment loan that is being carried while unemployed (living off savings).
The non-capital losses that are created are carried forward, and can be used to reduce income in a high earning year, and are therefore quite valuable.
There is presently minimal prospects of having future capital gains against which to apply the existing capital losses from previous years, so this method is an alternative to waiting for the person to die before the losses can be used.....


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## AltaRed (Jun 8, 2009)

Pliskin said:


> Agreed, capital losses can't be applied directly as non-capital losses.
> Eclectic12 seems to follow my thinking. By applying the capital losses to reduce the capital gains noted in my original post in item B, we end creating non-capital losses.


Okay, I get that part....


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## james4beach (Nov 15, 2012)

One of Pliskin's posts wasn't visible earlier because it was waiting moderation. His comments in the thread should all be visible now.


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