Written By: Suzanne Cody CPA, CGA
As a business owner, you may face a loss from time to time but this does not mean that all is lost! There are tax planning advantages which can help ease the stress that a year with poor financial performance brings.
For tax purposes there are different types of losses. Losses that occur from expanding your operations, the cost of starting up, or as a result of poor economic times are referred to as non-capital losses. A capital loss occurs when you sell an asset (capital property) at less than its cost, commonly known for tax purposes as its adjusted cost base. It is important to note that the tax application of a non-capital loss is different from a capital loss. Capital losses can only be used to reduce capital gains but non-capital losses are more flexible because they can be used to reduce income from other sources such as employment, RRSP and rental income.
Losses are not all bad. Non-capital losses occurring in your business can be used to offset other income. If the losses exceed your income from other sources, you have a non-capital loss which carried back up to three years to recover taxes paid in more prosperous years or carried forward to future years when you have taxable income. The carry forward period depends on the taxation year it occurred in:
- 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
For the most part, non-capital losses can be used to reduce any type of income. The timing of when to use the loss is optional but you should be aware that there are specific advantages to carrying the loss back to a previous tax year or saving it for a future period. Some of the things to consider are:
- 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?
- Is there a portion of the loss about to expire?
It’s best to consult with your accountant to determine the optimal time to use it.