When you incur a capital loss, the Canada Revenue Agency gives you 3 options:
- Apply the capital loss to the current tax year.
- Carry the capital loss backwards to any of the three previous tax years.
- Carry the capital loss forward to any future year.
Under normal circumstances it makes sense to apply the capital loss immediately for the current year in order to reduce your income tax liability (or increase your tax refund) right away. However, capital losses can only be applied against capital gains (they cannot reduce taxes owed resulting from any other type of income). As a result, it’s often the case that the capital loss cannot be applied for the current year, so it must be applied to a previous tax year or carried forward.
A capital loss can only be carried backwards to the previous 3 tax years. So a capital loss incurred in 2014 can be applied backwards only to 2011, 2012, and 2013 (although it can also be applied for 2014 and beyond, as long as it offsets capital gains).
The CRA provides details on the procedure for carrying back capital losses here: How is a 2013 loss carried back to previous years.
To carry back a capital loss, you’ll need to fill out Section III on Form T1A and send it by mail to your nearest tax centre (a list of tax centres can be found here). Assuming you are only applying for a capital loss carryback, only Section III needs to be filled out.
Even if you’re filing your income taxes online with tax software, this form still needs to be completed separately and sent via snail mail.