Last updated: Aug. 16, 2023
What is a Non-Capital Loss?
Small businesses and farmers often face financial losses for different reasons. These reasons can include starting up their business, expanding their operations, or economic downturns.
When doing taxes, a “loss” can have various meanings for the Canada Revenue Agency (CRA). The type of loss your business experiences can have a significant impact on your tax return.
A non-capital loss (NCL) occurs when your allowable business or investment expenses exceed your income within a given tax year.
If your business has a non-capital loss and it is greater than your other sources of income, you have two options:
- Carry back: You can apply the non-capital loss to the preceding three tax years to offset income from those years. This may result in a tax refund for those years if taxes were paid in those years.
- Carry forward: If you don’t want to carry back the loss or if there’s still a remaining loss after carrying back, you can choose to carry the loss forward for up to 20 years to offset future income.
This may help lower the taxes you’ll have to pay in those future years.
The income you apply the loss against can include that earned from employment (professional fees or commissions), rental, investments, or interest, etc.
Examples of non-capital losses
Non-capital losses can come from different sources including small business or rental property activities. These activities can include:
- Rental or property
- Small Business
- Farming or fishing
- Allowable business investment losses (ABIL)
For how many years can I carry back a non-capital loss?
After 2005, you can apply a non-capital loss to the previous three years or the following 20 years. Different rules apply to an ABIL loss (see more below).
Non-capital losses can be carried back up to 3 years to help recover previous taxes paid.
For how many years can I carry forward a non-capital loss?
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
What is an Allowable Business Investment Loss?
An Allowable Business Investment Loss (ABIL) is a special type of capital loss that you may claim if you experience a loss on an investment in a small business corporation or a small business corporation’s debt.
An ABIL is a capital loss arising from an arm’s length disposition of:
- shares of a small business corporation (SBC), or
- debt owed to the taxpayer by a small business corporation
Here are some key points you should know about ABIL:
- To claim an ABIL, you must have made the investment in shares or debt of a small business corporation. Generally, a corporation is considered “small” if it meets certain asset and income thresholds.
- The CRA considers an ABIL as a “capital loss.” They only allow a deduction of 50% of the ABIL from other income. This means that if you have an ABIL of $10,000, you can deduct $5,000 from your income for tax purposes.
- You can apply the ABIL against any source of income, not just capital gains. This provides some flexibility to offset other forms of income.
- You deduct an ABIL in the year it arises. Unused portions can be carried back 3 years and forward 10 years (for losses after 2003, as non-capital loss). If an ABIL remains unused after 10 years, it can then be treated as a capital loss and carried forward indefinitely as a deduction against taxable capital gains.
- There are some restrictions in the application of an ABIL including the requirement that the investment must be considered “completely worthless” to be considered an Allowable Business Investment Loss.
It’s important to note ABILs are very closely monitored by the CRA so always be prepared to back up your claim. Always consult with a qualified tax specialist to ensure you have the most accurate information and application of Allowable Business Investment Losses.
When should I carry back a non-capital loss?
There are times when it is advantageous to carry the non-capital loss back to previous years and recover taxes paid. Some things to consider:
- Did you pay a higher tax rate on your income than you are expecting to pay in the future?
- Are you expecting your business to show a reduced or lower profit in the coming years?
- Are you planning to sell your business soon?
- Do you want to carry the non-capital loss back to generate cash flow?
Whenever you plan to roll back a non-capital loss, you must do so within the year in which the loss occurred. If the loss remains unused in the year it happened, you can only carry the non-capital loss forward.
For example, if you incurred a loss in 2022 you must claim the rollback with your 2022 return. If you leave it unused in 2022, you will then only be able to carry it forward.
How do I carry back a non-capital loss?
If you are carrying back a non-capital loss to any of the last three years, you must complete Form T1A, Request for Loss Carryback, and include it with your Income Tax and Benefit Return. You can also send it separately.
For example, if you are filing your return for the 2022 tax year, you can use Form T1A to carry back losses back to 2019, 2020 or 2021.
Do not file an amended return for the year to which you want to apply the loss.
When should I carry forward a non-capital loss?
Carrying a non-capital loss forward to years where you believe you will pay a higher tax rate may help lower your overall tax payable.
Generally speaking, you can apply non-capital losses against any kind of income. If you expect large profits in the coming years, carrying the loss forward may help reduce your tax burden for those years.
Carrying a non-capital loss forward is optional. Different rules apply depending on the type of loss and the type of income you’re claiming the loss against. We recommend working with a tax specialist to ensure the non-capital loss carry forward will benefit your business.
Where do I find my non-capital loss carryover amounts?
If you have a CRA My Account, you can easily access your capital and non-capital loss carryover amounts under “Tax Returns”. Your Notice of Assessment will also have your available balances listed.
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