We all hate to lose money on a purchase or investment. Sometimes
a little tax relief can help ease the pain if you can deduct the
loss against capital gains you've realized, but often that very
real loss is a 'nothing' for tax purposes.
One type of property that doesn't give rise to a tax loss is
what's called 'personal use property.' If you bought a
personal use vacation property, for example, and sold it at a loss,
you wouldn't be able to deduct the capital loss against other
capital gains. If, on the other hand, you sold it for a gain, that
would be taxable. There are special rules to deal with small items
where the purchase price and the cost of the property are less than
$1,000. Generally speaking, sales of low value personal items
don't result in taxable events.
What if you lend money to someone and they don't repay you?
Can you deduct that loss? Maybe, maybe not. If you don't charge
interest on the loan and therefore you have no income-earning
purpose, the loss would be considered a nothing for tax. What if
you sell some personal property and agree to have the purchaser pay
you over time? If they don't repay the loan, that loss is more
than likely not deductible as well.
In the Tax Court of Canada case Elliott v The Queen (2005 TCC
135), the taxpayer found herself in a situation where she lent a
family company (in which she had no direct interest) a total of
$94,000. This amount was lost when the company shut down and could
not repay her. In deciding against her, the judge made the
Ms. Elliott's problem is not unusual, unfortunately. There
are many people who lend money and guarantee loans to small
businesses to corporations in which their spouses own shares but
they do not. Many of these people are not sophisticated in tax
matters. They do what they feel is important for the economic
well-being of the family. They do not consult lawyers or
accountants who may advise how to structure the loan or guarantee
so, if something goes wrong, then, for tax purposes, they could
deduct at least a portion of the money they may lose. Many of these
people and their spouses are hard-working people of modest means.
They do what they think is right; they are optimistic. They do not
foresee possible failure. When failure does come, they lose
everything....Our senior courts have told us there is no equity in
a taxing statute and as the Act is written, there is not much I can
do to help Ms. Elliott.
As this case demonstrates, there can be some harsh traps when
dealing with losses that arise from personal items or non-income
producing items. But what if you're dealing with your
investment portfolio and you sell some stocks at a loss? Surely you
can deduct those losses against capital gains, right?
Well, not necessarily. Let's say your investment advisor sees
an opportunity to sell 100 shares of a company that has lost value
and use that loss to offset gains you've had on other shares.
That sounds like a good idea. But if your investment advisor (or
your spouse's separate advisor) thinks that this cheap stock
would be a good one to hold onto in your spouse's portfolio and
acquires that same 100 shares within 30 days of your sale, your
loss is denied until your spouse sells those shares.
Another situation that can arise is if you hold the same stock in
more than one investment account. Your investment advisor may want
to sell a stock that has gone down in value, but if you hold that
same stock elsewhere and you bought that stock in the other account
at a low price, you may actually have a gain because your total
cost of the stock has to be averaged over all of that particular
stock you own (regardless of the account in which it is
As I've shown here, it's very important to ensure that not
only is the loss a valid one for tax purposes, but that nothing is
going to prevent you from claiming a valid one.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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