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What You Should Know About Non-Capital Losses

What Are Non-Capital Losses?

Most small businesses and farmers face a loss at some point, whether it’s from startup losses, expanding operations, or a result of a downturn in the economy.

When it comes to doing your taxes, a “loss” can mean a lot of different things to Revenue Canada. The type of loss your business experiences can have a significant impact on your tax return.

Non-capital losses are business losses that come when expenses exceed income in any given year. 

Examples of non-capital losses include unused losses from office, employment, business, or property, and unused allowable business investment losses (ABIL).

If your business has a non-capital loss for the year, there are a number of things you can do to enhance your company’s bottom line.

Carry Forward and Back Periods

Non-capital losses that are applicable to your taxes can be carried back up to 3 years to help recover previous taxes paid.

Depending on the taxation year, non-capital losses can be carried forward 7, 10, or 20 years and help reduce future taxable income and taxes payable.

The carry forward periods are:

  • For taxation years ended March 22, 2004 or earlier: 7 years
  • For taxation years ended after March 22, 2004: 10 years
  • For taxation years ended after 2005: 20 years, except ABIL

Advantages to Carrying the Non-Capital Loss Back

There are times when it is advantageous for a small business to carry the non-capital loss back and recover previous taxes. Some things to consider:

  • Were tax rates higher in previous years than they are expected to be in the future?
  • Do you expect to not report any profit in the coming years?
  • Will you be amalgamating or selling your business in the near term?
  • Do you want to carry the non-capital loss back to generate cash flow?

It’s important to remember that if you want to carry the non-capital loss back, it has to be done in the year the loss occurred. If the loss remains unused in the year it happened, you can only carry the non-capital loss forward.

Advantage to Carrying the Non-Capital Loss Forward

The use of carrying non-capital losses forward is optional. It’s best to talk to a tax expert to determine whether carrying the loss forward it beneficial to your small business.

If you think your corporate tax rates are going to increase in the future, you could receive a larger tax savings if you carry the loss forward. 

For the most part, non-capital losses can be applied against any kind of income. If you expect large profits in the coming years, carrying the loss forward will help reduce the tax impact on those years.

FBC, Helping Small Businesses Navigate Tax Season

The fiscal year just ended and many small business owners are gearing up for tax season. Unfortunately, there is a lot to understand when it comes to preparing and doing your taxes.

If you are not up to date on Revenue Canada’s ever changing tax laws, you could be missing out on some important deductions.

If you would like to see how using your non-capital losses will benefit your small business, contact the tax experts at FBC.

Whether it’s determining how to use non-capital losses, tax preparation, tax planning, bookkeeping, or financial planning, as Canada’s Farm and Small Business Tax Specialist, FBC has been helping farmers and small business owners from coast to coast with their tax returns for the last 65 years.

For more information on how an FBC tax consultant can help your farm or small business prepare and file your annual income taxes, call us today at 1-800-265-1002 or submit an online form and an FBC tax specialist will contact you at your earliest convenience.

Connect with your Local Tax Consultant to learn more