Tuesday, September 20, 2011
Here is something to keep in mind when using capital losses for an individual receiving Old Age Security (OAS) benefits.
1. Allowable capital losses in the year reduce taxable capital gains from the same year. To the extent the gains are greater than the losses, the amount is reported on line 127 of the T1 and form part of the taxpayer’s net income (NI).
2. Where the losses exceed the gains in the year, the excess loss has no impact on NI since the losses can only reduce capital gains. (See year of death for exception). This difference (losses less gains) is referred to as net capital losses and can be carried back three years and forward indefinitely.
3. Net capital losses from other years form part of the calculation of taxable income. (See the bottom of page 3 of a T1). They reduce a taxpayer’s taxable income and hence taxes, but not his total income or net income.
4. The OAS clawback is based on a taxpayer’s net income. As you can see, capital losses used in the year they occur reduce NI and impact favourably on the OAS clawback calculation. Losses from other years do not impact NI and may result in a clawback.
5. Given that taxpayers can often control the triggering of capital gains and losses, this bit of knowledge is something to keep in mind when making those decisions. However, tax planning should be a secondary consideration not the prime factor.