What is a loss in the eyes of the Canadian Revenue Agency?

"...(CRA) defines several types of losses that can be used to offset income. Here is a thumbnail sketch of three of the most common."

As tax season approaches it’s wise to understand legitimate losses and how to claim them.  Canada Revenue Agency (CRA) defines several types of losses that can be used to offset income.  Here is a thumbnail sketch of three of the most common.

Did you operate a proprietorship in 2012?  Suffer a business loss at the end day? It’s not the most pleasant feeling to not have made money, but there is a silver lining.

A “non-capital loss” occurs when a business loss exceeds income from all sources for that year.  So after expenses, excluding any wages paid to the proprietor, the loss can be carried back up to 3 years to off-set profits from those years and recover taxes paid at that time, or if there are no past profits, CRA permits a carry-forward for 20 years.

This also holds true for rental property companies and farming operations, although there are restricted farm losses for hobby farmers.

Tip:  If there are past profits, apply the loss to the oldest year first so that its applicability is not lost the following year if again a business loss occurs.

Then there are “allowable business investment losses” (ABIL). This loss occurs with non-recoverable debt or loss on shares of qualified small business corporations.  In other words, you invested in a corporation by way of loans or equity purchase and now the loan or a portion of it is deemed uncollectible, or the shares are valued at nil or sold at diminished value.

Tip: The 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 in the 10 year period, the ABIL is then treated as a capital loss (described next) and consequently is available indefinitely as a carry-forward.

Losses can also occur from the disposal of capital assets such as stocks and recreational property.  This is a “capital loss”.  However, before a true loss exists, all capital gains in 2012 from the disposal of assets have to be netted against all capital losses.  If the number is negative then there is a net capital loss.  And to be accurate, because CRA generously only requires 50 per cent of a capital gain to be reported as income, then only 50 per cent of a capital loss is applicable.

A little known fact is that capital losses can also occur on personal use property such as artwork, jewellery, sports cards, coins and the like if, and only if, there has been a declaration made with CRA listing the valuables with the current market value.

This may sound like some sort of hedge against the value dropping in your “soon-to-be-extinct penny collection” and therefore the creation of a convenient capital loss.  Just remember, once registered, if there ever is a capital gain upon the sale of a prized possession, this gain has to be reported.

Tip:  A capital loss cannot be used to off-set other income (except in the year of death). If there are no capital gains in 2012, then the capital loss can be carried back 3 years or forward indefinitely.  Remember to use the oldest year first and move forward in time from there.

This discussion doesn’t pretend to cover all the permutations associated with losses. See a professional regarding your situation.

Email Ron Clarke at ron.clarke@JBSbiz.ca