Business losses & loss relief
Loss relief is the most under-claimed area in Canadian self-employment. Knowing which loss applies to which income, which carry-period applies, and what record-keeping is required can convert a bad year into a multi-year tax shield.
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1. Non-capital losses
Losses from a business or property offset all other income in the year. Unused amounts carry back 3 years and forward 20 years (ITA s. 111(1)(a)). Carry-back is requested on Form T1A — useful to recover refunds from prior high-income years.
2. Net capital losses
Allowable capital losses (50% of capital losses) offset only taxable capital gains. Carry back 3 years, forward indefinitely (s. 111(1)(b)). On death they can finally be used against any income on the terminal return.
3. Allowable Business Investment Loss (ABIL)
Where a loss arises on shares of, or debt owed by, a Small Business Corporation that becomes insolvent, 50% of the loss is treated as a non-capital loss — offsetting all income rather than only capital gains (s. 38(c), s. 39(1)(c)). Reduces available LCGE going forward.
4. Restricted farm losses — Moldowan
Where farming is not the taxpayer's chief source of income (the Moldowan v The Queen [1977 SCC] test, as revised post-Craig v Canada [2012 SCC 43]), farm losses are restricted to $2,500 plus 50% of the next $30,000 — maximum $17,500 against other income per year (s. 31). The balance carries forward but only against future farming income.
5. CCA discretionary claim strategy
CCA is optional. In a loss year, claiming zero CCA preserves the UCC and avoids burning relief that has limited carry value. In a high-income year, accelerate CCA (within class rules) to maximise deduction value. Half-year rule (Reg. 1100(2)) and AccII rules (where still available) layer on top.
6. REOP — Stewart v Canada
The Reasonable Expectation of Profit test was scaled back by Stewart v Canada [2002 SCC 46]. A genuine commercial activity producing losses is generally still a source of income absent a personal-element overlay. Activities with significant personal elements (horse breeding, hobby farming) still face REOP-style scrutiny.
7. Record-keeping for loss years
CRA requires records to be kept for 6 years from the end of the year the loss is used— not the year incurred. A loss applied in year +20 requires records back to year 0 plus six.
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