There are many sources to earn money, such as being a sole proprietor, freelancer, landlord, or employee during weekdays and a business owner on weekends. You may also earn money from alternative sources such as interest on investments, copyright, commissions, rent on a boat, equipment, a workstation in your office, or a vacation home. A source of income can also become a source of loss. Who knows it better than a small business owner? The initial years of a business have more losses than profits. Losses may appear unfavourable, but individuals and business owners can still earn from them. They can use the previous losses incurred during their struggling days to reduce taxable income during peak days. However, to take advantage of the tax benefits associated with different types of losses, you need a thorough understanding of these losses, which is precisely what we will discuss in this article.

What Are Non-Capital Losses?

The Canada Revenue Agency (CRA) categorizes income and losses into two categories: capital and non-capital. Their tax treatment is also very different.

Capital gain/loss occurs when you sell an asset such as property, equipment, furniture, or investments for a higher/lower price than its actual cost. A capital gain can be reduced with a capital loss. Someone who is not working and earning can also have a capital gain or loss when they sell an asset.

Non-capital loss occurs only on active income, such as business income, rental income, employment income, dividends, and interest income. Here are a few scenarios of non-capital loss.

• You are running a small business. You incurred a lot of expenses initially and earned little revenue. Your business is running at a loss because expenses exceed income.
• You rented an apartment to a tenant and earned rental income. However, the tenant leaves early, and the apartment remains vacant for an extended period. You incur property taxes, maintenance charges, and other utility expenses, resulting in a loss.

A non-capital loss can be used to reduce a non-capital gain.

However, there is an exception to this. We will get to it later.

Before that, let’s understand how non-capital loss can save taxes.

Tax Treatment of Non-Capital Losses

The CRA allows you to use non-capital losses to reduce non-capital gains of the past three years or the future 20 years.

Carrying Back Non-Capital Losses: You can consider carrying back the loss to previous years if:

• You paid a higher tax rate on your past income and want to generate cash flow by recovering that tax.
• You are planning to sell the business.
• You expect business income to fall in the coming years.

If you plan to carry back a non-capital loss, you should do it within the year it occurred, or the opportunity will lapse. From next year, you can only carry forward the loss.

To carry back a loss, you don’t need to amend your tax return for that year. Attach Form T1A, Request for Loss Carryback, with your tax return.

Carrying Forward Non-Capital Losses: You can carry forward capital losses for 20 years by filing the loss on Line 25200 – Non-capital losses of other years – of your current income tax return.

However, there is an exception to the tax treatment of non-capital loss.

The Exception of Allowable Business Investment Loss 

According to the CRA, an Allowable Business Investment Loss (ABIL) is considered a capital loss, but it is used to reduce non-capital income.

Why so?

ABIL arises when you dispose of shares of a small business corporation or write off debt given to a small business corporation. It is a capital loss by definition, as you dispose of the shares.

The CRA treats ABIL differently. You can deduct only 50% of the ABIL loss.

Like non-capital loss, you can only reduce non-capital income from ABIL for the last three years or the next ten years.

If you are unable to use ABIL to reduce non-capital gain for 10 years, you can use it to reduce capital gain for an indefinite period.

To avail yourself of ABIL, you need a reasonable ground to consider a business investment “completely worthless”. The CRA closely monitors such transactions. Hence, it is recommended to seek professional help to perform complex deductions, which often involve multiple conditions.

Your accumulated non-capital loss is included in the notice of assessment. When and how to use these non-capital losses is a strategic decision.

Contact Edelkoort Smethurst CPAs LLP in Burlington to Help You with Business Accounting

A skilled accountant wears various hats to make your business efficient and maximize profits, such as converting non-capital losses to tax benefits. A professional accountant can analyze the numbers and maximize tax savings from business losses. At Edelkoort Smethurst CPAs LLP, our accountants provide services including tax filing, bookkeeping, and data-driven decision-making. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with the best accounting expertise, contact us online or by phone at 905-517-2297.