Turning Capital Loss into Cash

Have you reported net capital gain between 2016 to 2019 (or any of prior 3 years) and paid taxes on it?  Are you facing a drop in value of your investment portfolio?  Are you holding onto your stocks waiting for a rebound?

A simple strategy may be useful—trigger the loss to obtain a tax refund.  A taxpayer is not only able to use the capital losses in a particular year to reduce income from taxable capital gain;  if there is an excess of unapplied allowable taxable capital losses, the excess may be carried back for up to three (3) taxation years or carried forward indefinitely.

However, you should consult your tax accountant prior to implementing this strategy.  There are situations that a capital loss could be deemed to be nil under the Income Tax Act.  A superficial loss is one example of this:  A superficial loss refers to a loss of a taxpayer on the disposition of a property (including stocks) where the taxpayer OR an affiliated person acquires an identical property during the period that begins 30 days before and ends 30 days after the disposition of the property.  The superficial loss provision is intended to prevent a taxpayer from arranging for the realization of losses while either the taxpayer or an affiliated person effectively retain the property on which the losses were realized.

Opportunity to Shift the “Wasted” Capital Losses to A High Tax Spouse

What happen if a spouse (i.e. Husband) invested in stocks with unrealized capital loss but was unable to use the above strategy to obtain tax refund, while his wife has significant amount of unrealized capital gain?  Are there any ways to shift the capital loss from husband to his wife for her to reduce the capital gain tax?

The answer is YES!

The CRA has provided an interpretation in respect to a scenario where a taxpayer can effectively transfer capital losses to the spouse.  The example is illustrated below:

“One individual (the “Husband”) has a certain number of shares of XYZ (the “Old Shares”) in respect of which he has unrealized capital losses of $15,000 while his spouse (the “Wife”) has realized capital gains in excess of $15,000 with respect to the 2020 taxation year.  The Old Shares, which are capital property to the Husband and have a fair market value of $5,000, costs the Husband $20,000. The Husband sells the Old Shares in an arm’s length transaction on the open market for $5,000.  Immediately following the sale of the Old Shares by the Husband, the Wife purchases them for $5,000 on the open market the same number and type of XYZ shares (the “New Shares”) that were sold by the Husband.  The New Shares are identical to the Old Shares.  A short time following the expiration of 30 days after the sale by the Husband, the Wife sells the New Shares in an arm’s length transaction for their fair market value of $5,000.”

By employing the above series of transactions, the husband was able to shift the “wasted” $15,000 capital loss to the wife, where she can use it to offset her unrealized capital gains.

Please note that this strategy involves multiple sections of the Income Tax Act and requires precise execution, readers should consult their accountant for advice.


This article is intended for general information purposes only and does not constitute professional advice.  Income tax law and regulation change frequently and the content on this article may no longer reflect the current state of the law. If you have any specific questions, you should consult a professional services advisor or email us for further advice.