Sounds like an oxymoron.
Well, when it comes to taxes, it’s an accurate term. Canada Revenue Agency (CRA) defines several types of losses available to offset income. Here is a simple presentation of several common ones.
A loss from the disposal of capital assets such as stocks and recreational property is called a “capital loss”. This type of loss is used to offset any capital gains in the current year. If a net capital loss remains it can be carried back 3 years or forward indefinitely to offset capital gains in those other years.
Because CRA generously only requires 50 per cent of a capital gain to be reported as income, then CRA only allows 50% of a capital loss to be used.
An interesting fact, at least to collectors of prized items, is that capital losses can also occur on “personal use property” – sports cards, coins, artwork, jewellery – if a taxpayer makes a declaration with CRA identifying the valuables along with their current market value. However if there ever is a capital gain on your collection of, say, pennies – remember those coins – a capital gain will have to be reported.
Any capital loss existing in the year of death can be used to offset any type of income, not just capital gains.
An “allowable business investment loss” (ABIL) occurs with non-recoverable debt or loss on shares of qualified small business corporations that you loaned money to or invested in, and now all or at least a portion of it has no value.
An ABIL can be used to offset any form of income and can be carried back 3 years or forward 10. If carried forward and not used within 10 years, the ABIL is then treated as a capital loss and can be carried forward indefinitely.
For owners of proprietorships, rental properties and farms, if business doesn’t treat you well and you suffer a business loss at the end of the year, CRA considers this a “non-capital loss”. In calculating the business loss, any wages taken by the owner cannot be included as an expense against the revenue.
A non-capital loss can be carried back three years to off-set business profits, or carried forward 20 years to net against future business profits.
A final note, if after the application of a current year loss to any applicable current year income a net loss remains, it is usually best to apply that loss to the oldest available year first and move forward in time from there.
Ron Clarke has his MBA and is a business owner in Trail, providing accounting and tax services. Email him at ron.clarke@JBSbiz.ca. To read previous Tax Tips & Pits columns visit www.JBSbiz.net.