Operating losses and prior years’ taxes

If you carried on a business as a sole proprietor or partner in 2016 and incurred an operating loss, you can apply the loss against your other sources of income, such as investment income, capital gains and employment income. Losses on certain farming businesses may be restricted for the year (see topic 41).

Any business loss realized in a year must be deducted in full against your other sources of income. As a result, you may find you are unable to claim some or all of your non- refundable tax credits, such as personal amounts and medical expenses. You should check with your tax adviser to assess whether other family members can obtain a benefit from these lost credits.

If the operating loss exceeds your other sources of income, the excess may be carried back three years. To carry back the loss, you must file Form T1A with your return for the year in which the loss arises. If you’re unable to carry back the loss or choose not to, it can be carried forward for up to 20 years (10 years for losses that arose in taxation years ending after March 22, 2004, and before 2006, and seven years for losses that arose in taxation years ending before March 23, 2004). You’re free to choose the year to which you apply the loss. For example, if you expect your marginal rate of tax to increase in the future, you may decide to carry the loss forward rather than back to a prior year.

Tax tip: When carrying a loss back to a prior year, you have the option of using only a portion of your loss. For example, you might want to claim only part of the loss against income that was taxed at a higher marginal rate and apply the remaining portion of the loss to another year.