5 types of losses that can be carried forward and their definition
There are various types of losses that you cannot use for income tax purposes on your tax return. Fortunately, losses are not normally “lost” forever, and can be carried back or forward and used in other years. Here are 5 types of loss that can be used to your advantage.
1. Loss other than a capital loss
A business loss is considered a “non-capital loss”. Most often, you’ll have a non-capital loss in a year if your losses from all sources exceed your positive income from all sources for the year (we’ll deal with capital losses separately in the next section). For example, if you have investment income of $80,000 and a business loss of $90,000, your net income for the year will be nil, and the excess of $10,000 will be a non-capital loss that cannot be used in the year.
Non-capital losses can be carried back 20 years and forward 3 years, and applied against income from all sources in those years. If you are carrying back a loss, you must use a special form to amend the previous year’s declaration. The loss carried forward is deducted on your return after the calculation of “net income” for the year, in the calculation of “taxable income” (to which tax applies).
A scheduling rule states that non-capital losses from earlier years must be used before non-capital losses from more recent years. However, there is no scheduling rule as to which year you carry the loss forward or back. Let’s say, for example, that you have a non-capital loss in each of years 1 and 2. You wish to carry forward a loss. You must carry forward the loss from year 1 to year 2, but you could carry it forward to year 4 rather than year 3 (one option among others).
2. Net capital loss
You will have a net capital loss in a year if your allowable capital losses for the year exceed your taxable capital gains for the year. Allowable capital losses are half of capital losses; taxable capital gains are half of capital gains.
The net capital loss cannot be used in the year in question, even if you have other sources of income. (An exception applies in the year of death, where net capital losses may be applied against other sources of income in that year or the preceding year).
Net capital losses can be carried back 3 years or carried forward indefinitely. However, they can only be applied against taxable capital gains in those other years. (In other words, capital losses cannot be applied against employment, business or investment income).
A scheduling rule also applies to net capital losses, in the same way as the rule described above for non-capital losses.
A scheduling rule also applies to net capital losses, in the same way as the rule described above for non-capital losses.
3. Allowable business investment loss (“ABIL”)
An ABIL corresponds to half of a “business investment loss”, which is a specific type of capital loss. In very general terms, you may have a business investment loss if you realize a capital loss on the disposition of shares or debt securities of a private corporation that is actively engaged in business (various conditions apply).
Unlike allowable capital losses, an ABIL can be applied against both taxable capital gains and income from other sources in a given year. Excess unused ABILs can be carried back 3 years and forward 10 years, and applied against income from all sources in those years. After the 10th year of carry-forward, all unused ABILs become ordinary net capital losses and, as such, can only be applied against taxable capital gains.
4. Loss of a limited partnership
In most cases, a limited partner can only deduct his share of partnership losses up to the “at-risk amount” of his interest in the partnership. Although the concept of “at-risk amount” is complex, you can associate it with the “gross” amount you have invested in the limited partnership – which is not subject to any form of guarantee or other security that could reduce the financial risk associated with your investment. (The technical definition can be found in subsection 96(2.2) of the ITA. Other factors may also come into play).
Any excess of a limited partnership’s loss can be carried forward indefinitely, but only to the extent of your at-risk amount in future years. (Your partnership income for the year is generally added to the amount of the at-risk amount).
5. Loss on personal property
Most capital losses on the sale of personal-use property are simply not deductible for income tax purposes. However, losses on listed personal property (“LPP”) are deductible against gains on LPP in a year. If there is an excess of LDB losses, it can be carried forward 3 years or forward 7 years, but only to be deducted from LDB gains in those years.
BMDs include works of art, rare manuscripts and books, jewelry, stamps and coins.
If you have any questions about the types of losses that can be carried forward, please do not hesitate to contact our tax experts.
