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Where do I enter a T5008 slip on my tax return?

“I have a trading account and my bank sent me a T5008 slip and a trading summary for the year. Do I have to enter both of these on my tax return or just one? If so, which one?”

Ack! Whatever you do, do not enter both! You’ll end up paying double the tax. Now that I have your attention…

So what is a T5008 slip anyway?

You mean besides a slip I absolutely hate? I know, hate is a strong word. I wish I had the vocabulary to come up with something stronger.

You see, the T5008 is not sent out by your broker or bank to “assist you in preparing your taxes,” despite what the letter says that accompanies the slip. The Canada Revenue Agency requires your broker to prepare and send these out to you whenever certain types of trades/transactions occur. And, of course, your broker must send a copy of the T5008 slip to the CRA. So, the T5008 slip is really just a sneaky way for the CRA to keep an eye on people selling stocks.

What information is on the T5008?

The selling price of the security is always on the slip. The CRA knows exactly how much you received in proceeds for dumping the latest dog. As for the cost of the security (or ACB, adjusted cost base in tax talk) sometimes it’s on the slip, sometimes it’s not. Occasionally it may even be accurate. Usually it’s not.

So…if the cost is not correct on the slip, how do I calculate my taxable gain on my tax return?

I know! Right?? This is further complicated by the fact that not all types of trades need to be recorded on T5008’s, so often they are not even an accurate portrayal of everything a taxpayer has sold in a given year. The taxpayer is required by law to calculate accurate ACB’s of any stocks bought and sold throughout the taxation year. Relying only on the flimsy T5008’s is a recipe for disaster.

So what do you use the T5008 for then?

I put my coffee cup on it. Works great. Then I use the trading summary to enter all my trades for the year on Schedule 3. Just remember to use a weighted average when calculating the ACB’s of any stocks sold in the year. I’ll talk more about that in another post since it deserves its own.

For now, just remember what to use the T5008 for.

Nothing.

 

March 28, 2014 Posted by | Personal Tax, Random Questions, tax | , , | Leave a comment

What year should I carry my current year capital loss back to?

(Before or after reading this post you may want to refresh your memory with: What do I do with a capital loss?)

 

Here is a great question that I thought I’d pull out of the comments and make into a post. I’m sure many of you out there will find it useful:

My specific question is not how to facilitate the carryback loss (T1A), but rather which year going back is optimal to get the largest return?

Year -3 net income 50,000
Year -2 net income 80,000
Year -1 net income 100,000
This year (10,000) loss

Will I get more of a return for my loss if I apply it to Last year (Year-1) since it was my highest earning year?

At first glance it would seem to make sense to carry back his loss to the year that has the highest income (in this case Year 1: $100,000), but let’s look a little deeper to make sure. I’m going to walk you through my thought process here, which is usually a pretty murky bog, but I’ll try my best.

“Net Capital Losses” and “Capital Losses” are different animals.

1. What kind of loss are we dealing with?

“This year (10,000) loss”.

Is this a “capital loss” or a “net capital loss”? For a detailed description of how to calculate capital gains and losses go here. But generally, this should clear things up:

capital gain OR capital loss = proceeds – cost – other outlays

taxable capital gain OR net capital loss = (proceeds – cost – other outlays) x 50%

That 50% is the “capital gains inclusion rate” for the year in which the transaction took place. In other words, you only get taxed on 50% of capital gains, as opposed to 100% on employment income or interest income.

For this example, I’m going to assume that the above “$10,000 loss” is actually only a capital loss. So that would give us a net capital loss of $10,000 x 50% = $5,000 .

2. Did he have any “taxable capital gains” in the previous 3 years that he can write off this year’s “net capital loss” against?

Year – 3 net income 50,000
Year – 2 net income 80,000
Year – 1 net income 100,000

Unfortunately, the above only tells me what the person’s net income for the year was. What I really need to know is what were the person’s taxable capital gains (Line 127 on the tax return) for each of those years. Why? Because capital losses can only be applied against capital gains. This means you cannot decrease any other type of income (such as employment income) with a capital loss.

So, for the purposes of this example, let’s assume the following:

Year – 3 taxable income $50,000, of which $5,000 is a taxable capital gain (L127)
Year – 2 taxable income $80,000, of which $7,000 is a taxable capital gain (L127)
Year – 1 taxable income $100,000, of which $10,000 is a taxable capital gain (L127)

Using the above numbers, we see that he had enough gains that he could carry back his current year’s loss to any one of the preceding three years.

3. Find his tax brackets: Federal and Provincial

As we all know, we have federal taxes and provincial taxes here in Canada. And they change every year. Go here to find yours for this year or previous years: Income tax rates in Canada (tax brackets)

Federal tax brackets:

  • 15% on the first $41,544 of taxable income, +
  • 22% on the next $41,544 of taxable income (on the portion of taxable income between $41,544 and $83,088), +
  • 26% on the next $45,712 of taxable income (on the portion of taxable income between $83,088 and $128,800), +
  • 29% of taxable income over $128,800

BC enjoys 4 tax brackets:

  • 5.06% on the first $36,146 of taxable income, +
  • 7.7% on the next $36,147, + 10.5% on the next $10,708, +
  • 12.29% on the next $17,786, +
  • 14.7% on the amount over $100,787
Ontario is lucky to only have 3:
  • 5.05% on the first $37,774 of taxable income, +
  • 9.15% on the next $37,776, +
  • 11.16% on the amount over $75,550

But Alberta only has 1: a flat rate of 10%. Looks like I found the one I’ll be using for my example.

4. Calculate tax refunds

I’m going to assume my friend is from Alberta and enjoys a flat-rate provincial fleecing of 10%. So let’s calculate the different possible refunds.

Carry loss back to Year 3 (taxable income $50,000):
Federal taxes = $5,000 x 22% = $1100, AB taxes = $5,000 X 10% = $500
Total Refund= $1,600

Carry loss back to Year 2 (taxable income $80,000):
Federal taxes = $5,000 x 22% = $1100, AB taxes = $5,000 X 10% = $500
Total Refund= $1,600

Carry loss back to Year 1 (taxable income $100,000):
Federal taxes = $5,000 x 26% = $1300, AB taxes = $5,000 X 10% = $500
Total Refund= $1,800

Suspicion Confirmed

As we suspected, he will be better off to carry his loss back to Year 1. He will gain an extra $200 by doing so in this particular case.

However, if we do this, we will forever lose access to the gains in Year 3 (remember, you can only carry capital losses back three years). So if we are pretty sure we are going to have capital losses next year, we may want to carry the current year’s losses all the way back to Year 3, since there is only a $200 difference. But if this year’s loss is a rare event, it makes more sense to get the biggest bang for the loss and carry it back to the year with the highest taxable income.

March 6, 2012 Posted by | loss carryback, Personal Tax, tax, tips | , , , , , | Leave a comment