Capital gains and losses need to be reported on your tax return, but you must actually realize the gain or loss before you can report it. If you are watching one of your investments slowly lose its value, you have to sell it before it is considered a capital loss for tax purposes.
Capital gains and losses are reported on your Schedule 3 as part of your T1 tax return. The first step is to report each capital disposition or sale in the correct section. For each transaction, you need a description of the property, the year of acquisition and the information to report a capital gain or loss.
This is why record keeping is very important for calculating capital gains accurately. You need to have documents related to the acquisitions as well as the dispositions. This would include the date of acquisition, purchase price, commissions and any other expenses. All of this information is rarely on just one statement. If you purchase a capital property, keep all the documents related to the sale, so completing your Schedule 3 is much easier.
You show the capital gain or loss in the last column on your Schedule 3. The second step is to total all the numbers and report the net amount in the information slip section.
The third step is to calculate the total capital gain or loss by calculating the capital gains minus the capital losses. If your gains exceed your losses, you will report a capital gain on your tax return. However, capital gains are not taxed at the same rate as income, so you multiply the amount by 50 per cent before transferring it to your tax return.
Taxable capital gains from your Schedule 3 are carried to Line 127 and included in Line 150 as part of your total income. The amount of tax you will pay on capital gains depends on your marginal tax rate.
Capital losses are not carried to Line 127, so they are not subtracted from your income. In general, capital losses cannot be used to reduce income from other sources. They can only be used to reduce capital gains. But you are allowed to carry your capital losses backward or forward to offset capital gains in other years.
Net capital losses can be carried back three years to reduce a capital gain in the last three years or you can carry them forward indefinitely to reduce the capital gains in future years. Any capital loss carry forward should be included on your Notice of Assessment or you can access the information through My Account.
If you are an active investor or expect to be reporting a capital gain in 2012, it is important to have the documents and records available to complete your return. You also need to keep the information in case the Canada Revenue Agency (CRA) asks for more details. It may be a good idea to sort through your paperwork before the tax deadline is here.