Taxable Income of an individual is equal to Net Income for Tax Purposes (also known as Division ‘B’ Income) less a group of deductions found in Division ‘C’ of the ITA. There are lots of Division ‘C’ deductions however we will focus on two important ones: Net Capital Losses and Non-Capital Losses.
Net Capital Losses are generated when Allowable Capital Losses (1/2 of Capital Losses) exceed Taxable Capital Gains (1/2 of Capital Gains) in a year. In this scenario the net taxable capital gain in S3(b) will be $Nil and the negative amount will become a Net Capital Loss. Net Capital Losses can only be applied against S3(b) net Taxable Capital Gains in a year. They can be carried back 3 years or forward indefinitely. See ITA 111(1.1) for more details
Non-Capital losses are created when the S3 ordering rules create a negative amount. In this situation Net Income For Tax Purposes (‘NITP’) will be $Nil and the negative amount will become a Non-Capital Loss. Non-Capital Losses can be applied against NITP in a given year. They can be carried back 3 years or forward 20 years. See ITA 111(5.4) for more details.
Example: Mr. Smith has NITP of $25,000. He has a Net Capital Loss of $4,000, and a Non-Capital Loss of $2,200 carried from previous years. Mr. Smith’s S3(b) amount is $1,500. His Taxable Income would be calculated as follows:
Net Capital loss…………………… $(1,500) (can only be applied against S3(b) amount)
Non-Capital loss…………………. $(2,200) (can be applied against all sources of income)
Taxable income = $21,300
The remaining Net Capital Loss of $2,500 ($4,000-$1,500) could be applied against net TCG’s in other years.
Interactive content (author: Falak Sharma, Feb 2019)
Interactive content (Author: Jasmeen Boparai, January 2020)
References and Resources:
- ITA 111(1.1), 111(5.4)
- Competency map: 6.3.2