UNUSED LOSSES – CARRY THEM BACK OR FORWARD
There are various types of losses that you cannot use for tax purposes in your return for a given year. Fortunately, the losses are normally not “lost” forever, and can be carried back or forward and used in other years.
A business loss is called a "non-capital loss". In general terms, you will have a non-capital loss in a year when your losses from all sources exceed your positive income from all sources for the year (capital losses are dealt with separately as discussed under the next heading). For example, if you have $80,000 of investment income and a $90,000 business loss, your net income for the year will be zero, and the excess $10,000 will be a non-capital loss that cannot be used in the year.
Non-capital losses can be carried forward up to 20 years or back 3 years to offset all sources of income in those years. If you are carrying back a loss, a special form is used to adjust the previous year’s return. The carried-over loss is deducted on your return after calculating "net income" for the year, when computing "taxable income" (on which tax applies).
An ordering rule provides that earlier years’ non-capital losses are used before later years’ non-capital losses. However, there is no ordering rule in terms of the year that you carry the loss forward or back to. For example, say you have a non-capital loss in each of years 1 and 2. You want to carry a loss forward. You must carry forward the year 1 loss before the year 2 loss, but you could carry it forward to year 4 rather than year 3 (as just one option).
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 one-half of capital losses; taxable capital gains are one-half of capital gains.
The net capital loss cannot be used in that year, even if you have other sources of income. (An exception applies in the year of death, when net capital losses can offset other sources of income in that year or the preceding year.)
Net capital losses can be carried back 3 years or forward indefinitely to other years. However, they can only offset taxable capital gains in those other years. (In other words, capital losses cannot be used against employment, business or investment income.)
An ordering rule also applies to net capital losses, similar to the rule discussed above for non-capital losses.
Allowable business investment loss (“ABIL”)
An ABIL is one-half of a “business investment loss”, which is a special kind of capital loss. In very general terms, you may have a business investment loss if you realize a capital loss on a disposition of shares or debt in a private corporation engaged in active business (various conditions apply).
Unlike allowable capital losses, an ABIL can offset both taxable capital gains and other sources of income in a year. Excess unused ABILs can be carried back 3 years or forward 10 years to offset all sources of income in those years. After the 10th forward year, any unused ABILs become regular net capital losses, and from that point on can only offset taxable capital gains.
Limited partnership losses
In general terms, a limited partner can deduct its share of losses from a limited partnership only to the extent of the partner’s “at-risk amount” in respect of the partnership. Although the concept of the at-risk amount is quite complex, you could think of it as the “hard” cost or amount that you have invested in the limited partnership – the amount that is not subject to any kind of guarantee or benefit that might reduce your financial exposure in terms of what you have invested. (The technical definition is found in subsection 96(2.2) of the Income Tax Act, and other factors can come into play.)
Any excess limited partnership loss can be carried forward indefinitely, but only to the extent of your at-risk amount in future years. (Your income from the partnership for a year generally adds to the at-risk amount.)
Personal-use property loss
Most capital losses from selling personal-use property are simply not deductible for income tax purposes. However, losses from listed personal property (“LPP”) are deductible from gains from LPP in a year. If there are excess LPP losses, they can be carried back 3 years or forward 7, but only to offset gains from LPP in those years.
LPP includes artwork, rare books and manuscripts, jewelry, stamps, and coins.