Capital Loss Carryforward Cross-Border: Canada-US

Both Canada and the US allow capital losses to offset capital gains, with unused losses carrying forward to future years. In Canada, net capital losses carry forward indefinitely and can be applied against capital gains in any future year (they can also be carried back three years). In the US, capital losses offset capital gains dollar for dollar, with up to $3,000 of excess losses deductible against ordinary income per year, and the remainder carried forward indefinitely. The cross-border problem: a capital loss incurred in one country does not transfer to the other country’s tax system. When you move between Canada and the US, your loss carryforwards stay behind.

How do capital losses work in Canada?

Under ITA 111(1)(b), net capital losses can be carried forward indefinitely and carried back three years. A “net capital loss” is the excess of allowable capital losses (50% of actual losses at the current inclusion rate) over taxable capital gains (50% of actual gains) for the year. Key rules:

• Capital losses can only offset capital gains (not other income), except in the year of death, when net capital losses can offset any income.
• The superficial loss rule denies losses on assets repurchased within 30 days before or after the sale (the denied loss is added to the ACB of the replacement shares).
• The departure tax under ITA 128.1(4) deems a disposition of all capital property at FMV. If the deemed disposition produces a gain on some assets and a loss on others, the losses offset the gains on the departure return. Any net loss that remains carries forward on the Canadian file.

How do capital losses work in the US?

Under IRC 1211, capital losses offset capital gains. If losses exceed gains, up to $3,000 of excess losses ($1,500 if married filing separately) can be deducted against ordinary income. The remainder carries forward indefinitely under IRC 1212. Key rules:

• Short-term losses first offset short-term gains; long-term losses first offset long-term gains. Net short-term losses offset net long-term gains, and vice versa.
• The wash sale rule under IRC 1091 denies losses on securities repurchased within 30 days after the sale (the denied loss is added to the basis of the replacement shares).
• There is no departure tax when leaving the US (the US taxes citizens on worldwide income regardless of residence, and non-citizens simply stop being US residents). US capital loss carryforwards remain available on future US returns if the person continues to file (as a citizen or as a non-resident with US-source income).

What happens to my Canadian losses when I move to the US?

Your Canadian net capital loss carryforward stays on your Canadian tax record. After you move:

• If you sell Canadian real property or other taxable Canadian property as a non-resident and realize a gain, the carryforward can offset that gain.
• If you have no future Canadian-source capital gains, the carryforward sits unused indefinitely.
• The carryforward cannot be transferred to your US return. The US does not recognize Canadian capital losses.

Planning opportunity: Before leaving Canada, consider realizing capital gains to absorb the loss carryforward. Sell appreciated assets, use the carryforward to offset the gain (resulting in little or no Canadian tax), and then repurchase the assets with a reset ACB at the current FMV. This is the mirror image of tax-loss harvesting: you are deliberately triggering gains to use up losses before they become stranded.

Be aware of the superficial loss rule in reverse: if you sell at a gain and the departure tax also deems a disposition, the interaction needs to be modeled. And if you repurchase within 30 days, the superficial loss rule does not apply (it applies to losses, not gains).

What happens to my US losses when I move to Canada?

If you are a US citizen, your US capital loss carryforward remains available on future US returns (you continue filing as a US citizen worldwide). The carryforward offsets future US-source or worldwide capital gains.

• If you are not a US citizen (e.g., a Canadian who was a US resident on a green card or work visa), your US loss carryforward remains available only if you continue to have US-source capital gains as a non-resident. If you abandon your green card or lose resident status and have no US-source income, the carryforward may go unused.
• In either case, the US loss carryforward cannot offset Canadian capital gains. Canada does not recognize US capital losses on the Canadian return.

How does the FTC interact with loss carryforwards?

The FTC does not solve the loss carryforward problem. The FTC credits foreign tax paid against domestic tax owed on the same income. A capital loss carryforward is not a tax paid; it is a reduction in future taxable income. The FTC cannot convert a foreign loss into a domestic deduction.

• However, the FTC does interact with capital gains when both countries tax the same gain. If you sell an asset after moving and both countries tax the gain (different amounts because of basis/ACB differences), the FTC on Form 1116 credits the foreign tax against the domestic tax. But the loss carryforward in the other country remains a separate issue, usable only on that country’s return.

What should I do next?

If you have capital loss carryforwards in either country and are planning a cross-border move, model the pre-move gain realization strategy. Determine which assets can be sold to absorb the losses before they become stranded. If you have already moved and have unused carryforwards in the country you left, identify any remaining taxable income in that country (rental property, deemed dispositions) that could absorb the losses.

• Tax-loss harvesting across the border, the loss realization rules and the superficial loss/wash sale interaction
• Cost basis vs adjusted cost base, the basis/ACB divergence after a move
• Capital gains tax: Canada vs US compared, the rate differences
• Departure tax when leaving Canada, the deemed disposition that can create or absorb losses
• Year-end tax planning cross-border, the timing of gain and loss realization

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.