A Guide to Canadian Tax Losses

In this blog post we will go over an explanation of how losses can be advantageous for your personal and corporate taxes.

What is a loss?

The definition of a loss is quite simple. If you have a business and your expenses in a single year exceed the revenue or sales that your business generated during that year, you are in a loss position.

Why are losses useful?

Losses can be helpful in reducing the amount you owe in taxes in a given year because they can be used to offset profit or income. 

More importantly, the CRA allows losses to be carried back to offset income reported in previous tax years or carried forward to offset against future income. The carry back and carry forward option provides individuals and businesses with a fantastic tax break. Therefore, as a business owner, you only start paying taxes once you’ve used up your losses. 

So, the next time someone tells you that losses suck, you can tell them “Yes, loses suck, but they can be useful for tax purposes!”

Personal Tax Losses on your Tax Return

When it comes to reporting income as an individual, your income is reported on a cash basis and not on an accrual basis. If you’re self-employed, you must calculate your income using form T2125. 

The net result from form T2125 is reported on your tax return as shown in the image below. You will notice that you report two amounts: (1) the Gross amount which is equal to your total sales or revenue for the year, and (2) the Net amount which is the gross amount net of your expenses.

If the income you’re reporting is in a loss position on line 27, you can offset this loss against your other sources of income included on your tax return such as income from a salary, investment, etc.

What is a Capital Loss?

A capital loss is incurred when you’re selling capital property. There are various tests from CRA that determine whether or not the property you’re selling is considered to be capital property. 

Generally, capital property is defined as an asset that is acquired to generate profit, interest, dividends, royalties, or rents. There must be an expectation with a capital property that it will be held for some time to produce income instead of being bought and sold for a quick profit.

Capital Loss Carryovers Rules

A capital loss can only be offset against a capital gain. If you’re not reporting a capital gain in the year that you’ve incurred capital loss, you can carry back the capital loss to offset it against previous capital gains for up to three years. If this is not an option, you can carry forward the capital loss to offset it against future capital gains indefinitely.

If you’re an individual and you’d like to carry back a capital loss to offset it against a capital gain from the last three years, you don’t need to refile your previous tax return. Instead, you can submit a T1A form Request For Loss Carryback with your current year’s tax return and the CRA will apply the loss accordingly. 

What is a Non-Capital Loss?

A non-capital loss is the more common loss you will incur as a business owner and is the result of the calculation of income that is, revenue less expenses, from a business or a property. 

An example of a non-capital loss associated with a property is the loss you could incur from a rental property where the rent received is less than the expenses for that rental property.

Non-Capital Loss Carryovers Rules

Like our discussion above on the capital loss carry over rules, a non-capital loss can be offset against profit in the year it is incurred.

If losses remain, they can be carried over. However, a non-capital loss can only be used in a carry-over period once all loss carry-overs from preceding years have been exhausted.

You can carry back a non-capital loss to offset a previous year’s reported income for up to three years. If this is not an option, you can carry forward the capital loss to offset it against future income or profits for up to 20 years.

Loss Continuity Schedule

In order to determine the continuity of all available capital and non-capital losses, your accountant will need to fill out the Corporation Loss Continuity and Application Schedule known as T2 Schedule 4. 

This schedule also allows you to apply the capital and non-capital losses you’re carrying over from previous tax years to the current tax year.

Listed Personal Property Losses

Listed Personal Property Losses also known as LPP losses can only be offset against gains from Listed Personal Property. Listed Personal Property is defined by the CRA as:

• Prints, etchings, drawings, paintings, sculptures or other similar works of art
• Jewellery
• Rare folios, rare manuscripts or rare books
• Stamps
• Coins

Listed Personal Property losses can be carried back to offset against gains from Listed Personal Property for up to three years and can be carried forward for up to seven years.

Do you need a report a loss in your business? Let us help you. Get in touch with us here or sign up to get more accounting and tax tips in our newsletter here.

The accounting and tax information provided in this post does not constitute advice and is meant to be for general information purposes only. The information is current as at the date of this post and does not reflect any changes in accounting and/or tax legislation thereafter. Moreover, the information has been prepared without considering your company or personal financial/tax circumstances and/or objectives.