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How to Increase Your Tax Savings Using “Loss Carryovers” to Decrease Your Taxable Canadian Income

posted 12 months ago

Loss Carryovers as a Potent Method of Decreasing Taxable Income.

Taxpayers have the opportunity to use “loss carryovers” to offset taxable income when they incur business or investment losses. It is critical for taxpayers to be aware of the regulations restricting their use because the use of these deductions depends on the timing and nature of the loss that was incurred. Taxpayers should consult with top tax lawyers in Toronto to maximize their ability to save on taxes by grasping the nuances of loss carryovers.

Difference between non-capital losses and capital losses

In the world of taxation, a net non-capital loss, also known as a business loss, occurs when a taxpayer’s business expenses for a given tax year exceed their business income for the same year. Such losses may be carried forward for a maximum of 20 years and may also be applied backward for a maximum of three years to reduce the taxpayer’s taxable income during those years, in accordance with paragraph 111(1)(a) of the Canadian Income Tax Act. It’s important to remember that the deduction amount cannot be greater than the taxpayer’s taxable income for the current year. As a result, the taxpayer is permitted to declare nil income for that specific year and, in accordance with the aforementioned guidelines, use the surplus loss to lower their income in future years. Taxpayers can successfully control their tax payments and maximize their tax benefits by using this tax planning strategy.

A taxpayer has a net capital loss when, during a particular tax year, his or her net capital loss surpasses his or her net taxable capital gain. When a taxpayer sells a capital asset for a price other than what they paid for it when they first bought it, capital gains or losses result. The capital gains in the three tax years prior and any future tax year may be offset by these losses, in accordance with paragraph 111(1)(b).  

Two situations are exempt from this regulation. First of all, pursuant to subsection 111(2), the net capital loss for the tax year in which a taxpayer passes away, as well as any unclaimed net capital losses from past years, may be written off as non-capital losses in the year of death and the tax year immediately before. Second, if allowable business investment losses (ABIL) are not fully deducted in the year they are incurred, they may be carried forward under the same terms as non-capital loss carryovers.

The carryover regulations for farm losses and restricted farm losses are described in paragraphs 111(1)(c) and 111(1)(d), respectively, of the Canadian tax act. Subsection 111(8) also offers instructions for calculating farm losses. Taxpayers should be aware of the existence and consequences of these specific kinds of losses even though they won’t be the major topic of this article. It is strongly recommended to ask for guidance from a knowledgeable Canadian tax lawyer in Toronto if people are confused of how to correctly categorize their losses. Their knowledge will guarantee that these issues are handled correctly and in accordance with the law.

What Types of Losses Can Be Claimed As Non-Capital?

The Supreme Court of Canada created a two-part test to evaluate whether losses from an endeavor can be claimed as business losses, making them deductible from taxable income, in the case of Stewart v. The Queen, [2002] 3 CTC 439, 2002 DTC 6969 (SCC). The following factors are taken into account:

  • Is the taxpayer’s activity conducted with the goal of producing a profit or is it just a hobby?
  • If the activity is not solely personal, the next stage is to determine if the source of income is a business or a piece of real estate.

The taxpayer’s desire to generate a profit must be obvious in order to prove that the activity is truly conducted for profit. This can be done by looking at a variety of objective criteria listed in the Moldowan v. MNR 77 DTC 5213 case. These elements comprise:

  • The prior years’ record of profit and loss.
  • The taxpayer’s level of knowledge or education in the pertinent subject.
  • The taxpayer’s anticipated course of action with respect to the business.
  • The possibility for the business to turn a profit.

It’s crucial to remember that this list of elements is not all-inclusive and that any business endeavor may require special consideration. An activity can still be regarded as a source of income if it is conducted in a sufficiently commercial manner and the main goal is to make a profit, even if it has features that could be called a hobby or personal pursuit. Courts normally refrain from questioning the taxpayer’s business judgment; instead, they focus on whether the venture is conducted with objective business-like behavior.

The main deciding factor is not whether or not a profit was actually realized; rather, it is whether or not there was an actual purpose to benefit from the activity. The analysis that was just stated is quite fact-specific. If one is uncertain as to whether their business will be eligible for non-capital loss deductions, they ought to seek the advice of a knowledgeable Canadian tax lawyer.

Pro Tax Tip: To Be Eligible for Deduction in the Same Year, Capital Losses Must Be Settled by Year’s End

It’s essential for the deal to “settle” at the year’s end in order to be eligible to deduct capital losses during a certain tax year. For the majority of North American stock market equities trades, this results in a settlement delay of the trade date plus an additional two business days (T + 2) from the time the sell order is placed until the trade is deemed to have “settled.”

In order to fulfill the T + 2 settlement window and be eligible for a deduction in that year if the stock exchange is closed in the weeks before year-end, the sell order must be started earlier. An effective technique for people who have accumulated losses on assets like crypto currency is to sell the asset before the end of the year in order to realize the losses. But it is highly advised to obtain advice from a knowledgeable Canadian crypto tax lawyer in order to precisely identify whether the loss belongs in capital or income accounts.

Clarity and certainty regarding the proper tax treatment of such losses will be provided by having a skilled professional draft a memo. Taxpayers can maximize their deductions and successfully abide by tax legislation by managing capital losses proactively and comprehending the settlement criteria.


What Does Tax Loss Harvesting Mean?

Tax loss harvesting is a purposeful tactic used by investors to balance off their capital gains. They can counteract the financial gains made from other investments by purposefully selling some assets at a loss. They can use this method to offset unrealized losses, which are losses that are not yet recognized and must wait until the associated asset is sold. As a result, selling an investment with an unrealized loss to cover prospective deductions is part of the procedure.

Allowable Business Investment Losses (ABIL) are losses suffered when someone sells or otherwise disposes of shares or debt to a third party at arm’s length in one of the following circumstances:

1. Small Business Corporation (SBC): Shares that were part of a ≈ (SBC) are referred to as such.

2. Debt due by a Canadian-Controlled Private Corporation (CCPC): If the loss results from a debt owed by a Canadian-controlled private corporation and the debt falls under one of the following categories:

a. A small business corporation (SBC) was the CCPC.

b. The CCPC went bankrupt and at the time of its bankruptcy, it was an SBC.

c. The CCPC was declared bankrupt in accordance with WURA’s (Winding-up and Restructuring Act ) definition at the time of its winding-up order when it was an SBC, making it subject to Section 6 of that Act’s provisions.

Under certain conditions, the ABIL permits individuals to deduct losses from the sale of shares in small business enterprises or debts due by qualifying Canadian-controlled private corporations.

Superficial losses aren’t allowed to be deducted from taxes. If a taxpayer sells a capital asset at a loss and then buys another one that is exactly the same within 30 days of the first sale, that transaction is considered to have only suffered superficial losses. If the taxpayer still has ownership of, or the right to purchase, the property within 30 days after the sale, they, their spouse, or particular affiliated persons are affected.

What Losses Are Not Deductible?

Losses incurred during the transfer of shares to registered accounts like RRSPs, TFSAs, DPSPs, or RDSPs are also not tax deductible. The superficial loss exception, however, allows for the possibility of claiming a loss when the sale of shares happens as a result of an option expiring.

Visit the Canada Revenue Agency’s web page on non-superficial losses for more information in-depth on the subject. It is always important to consult with one of our knowledgeable Canadian tax lawyers for guidance in circumstances where there is doubt regarding deductible losses. They can offer insightful advice on the best course of action to take in your particular circumstances.


The general information contained in this article is based on the facts known as of the time it was published. Some of the information might no longer be accurate or relevant due to the lack of an update. It is not intended to be a substitute for legal counsel, and decisions should not be based on it. Depending on specific facts, tax situations can vary substantially from those in this article and from other situations. It is crucial to seek guidance from an experienced Canadian tax lawyer who can offer you individualized counsel that is particular to your circumstances if you have specific legal questions about taxes.

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