Non capital loss
A non-capital loss is a loss for a particular year that includes any loss incurred from business, property or an employment. In case one's allowable business investment loss realized in the specific year is more than one's other sources of income for that year, the difference should be included as a part of one's non-capital loss[1]. In relation to the business, a non-capital loss occurs when in any given year expenses of the company are above and over the amount of its income[2].
Non-capital losses, together with fishing and farming losses might be carried three taxation years back and twenty taxation years forward. In order to carry back losses in taxation year for which a tax return form has been filled, the company needs only file one form and not a full adjusted tax return form[3]. After ten years the losse expires and can no longer be used[4].
Items included in non-capital losses are[5]:
- partnership income,
- employment income,
- investment income,
- rental income,
- professional, business or commission income or losses,
- fishing or farming income of losses,
- non-taxable income,
- taxable capital gains,
- net capital losses of past years,
- certain other deductions (e.g. deduction of the capital gains, the business investment losses deduction, stock options and shares deductions, deduction for employee home-relocation loan, other payments deduction, income exempt under a tax treaty.
Application of capital losses
Ratepayer may choose to apply capital losses in proportion to capital gains in any order. Usually the best outcome can be achieved when capital losses are offset against capital gains as per the following sequence:
- To capital gains that have neither Capital Gain Tax (CGT) discount nor the benefit of indexation based on the cost.
- To capital gains calculated with indexation based on the cost.
- To capital gains that have the CGT discount benefit.
As long as complying pension fund chooses to demand the frozen indexation option, the application of capital losses against the capital gain can take place after deduction of the cost base, including indexation, from the capital proceeds. In case frozen indexation option is not available or not chosen, the capital gain's calculation is done by deduction of the cost base, excluding indexation, from the capital proceeds. CGT discount is applied against the capital gain after capital losses[6].
Examples of Non capital loss
- Loss of profits or income due to an economic downturn, or decrease in demand or sales.
- Loss due to destruction of property or assets, as in the case of a natural disaster such as a flood or fire.
- Loss due to theft or vandalism of assets.
- Loss due to poor management or bad decision making, such as investing in a stock that does not perform as expected.
- Loss due to legal liabilities or judgments, such as a court ruling against a business.
- Loss due to changes in the tax laws, such as the introduction of new taxes or the increase of existing ones.
- Loss due to foreign exchange fluctuations.
- Loss due to depreciation of assets, such as a building or equipment.
- Loss due to uninsured losses, such as medical expenses for an employee.
- Loss due to uncollectible accounts receivable.
- Loss due to bad debts.
- Loss due to the disposal of an asset below its purchase price.
Advantages of Non capital loss
Non-capital losses can provide several advantages for individuals and businesses. These include:
- The ability to offset any other income for the year, such as capital gains. This can result in a lower tax rate for the individual or business.
- The ability to carry forward non-capital losses for up to three years to be used in future tax years. This can be used to offset any future income, resulting in a lower tax rate.
- Non-capital losses can be used to reduce the amount of taxes paid in certain provinces. This can result in lower taxes being paid overall.
- The ability to claim a refundable tax credit for non-capital losses in certain provinces. This can result in a cash refund being received.
Limitations of Non capital loss
Non-capital losses are subject to certain limitations, including:
- Carry forward: Non-capital losses can be carried forward and applied against income earned in the future years.
- Carry back: Non-capital losses can be applied against income earned in the previous three years.
- Maximum Deduction: Non-capital losses are limited to the lesser of $3,000 or total taxable income.
- Income from Other Sources: Non-capital losses can only be applied against income from business, property or an employment; they cannot be applied against capital gains or other income sources.
- Time Limitation: Non-capital losses must be claimed within seven years from the end of the year in which the loss was incurred.
- Restrictions on Losses: Certain restrictions may apply to the types of losses that can be claimed as non-capital losses.
Non-capital losses can be offset against active business income, taxable capital gains, and other income sources. Other approaches to dealing with non-capital losses include:
- Utilizing the non-capital losses by carrying them forward to the next tax year: This approach involves deducting the non-capital losses that have been accumulated in the current year from the tax payable on the income sources in the following year.
- Splitting the non-capital losses with a spouse or family member: This approach allows for the non-capital losses to be split up between two spouses or family members, allowing for a more effective use of the losses and reduction in the overall tax payable.
- Converting the non-capital losses into capital losses: This approach involves converting the non-capital losses into capital losses, which can then be used to offset any capital gains that were made in the same year.
In summary, non-capital losses can be offset against active business income, taxable capital gains, and other income sources. Other approaches to dealing with non-capital losses include carrying them forward to the next tax year, splitting them with a spouse or family member, or converting them into capital losses.
Footnotes
| Non capital loss — recommended articles |
| General reserve — Disposal of fixed assets — Unearned Premium — Reversionary bonus — Effective rent — Gross fixed assets — Book profit — Deferred expense — Property Dividend |
References
- Beam, R.E., Laiken, S.N., Barnett, J.J., (2007),Introduction to Federal Income Taxation in Canada, CCH Canadian Limited
- Bateman, G.L., (ed.), (2004) A Declaration of Taxpayer Rights, Bateman Financial
- Campbell, D., (2008) The Comparative Law Yearbook of International Business, Kluwer Law International
- Henderson, C., Quinlan, B., Schultz, S., (2010) 78 Tax Tips For Canadians For Dummies, John Wiley & Sons
- Leow, J., (2010), Australian Master Superannuation Guide 2010/11, CCH Australia Limited
- Non-capital Loss(2019), "Business Dictionary"
Author: Klaudia Słota
