Making the Most of Your Losses
Losses are hardly ever viewed in a positive light, but if you do have losses then here are ways to take advantage of them.
If your business loses money
If your business loses money one year, you create a non-capital loss. A non-capital loss can be used to offset against all types of income. You can either carry back the loss to recover taxes already paid in the previous three years or carry it forward for 20 years to offset taxable income in the future.
If you sell an asset for more then you bought it
If you sell an asset for more then you bought it you create a capital loss arises. An example is the sale of equipment or an investment. The difference between capital and non-capital losses is that capital losses can only be used to offset capital gains whereas non-capital losses can be used to offset any type of income. Similar to non-capital losses, capital losses can be either applied against capital gains in the past three years or can be brought forward to offset future taxable capital gains. Unlike non- capital losses, capital losses can be carried forward indefinitely
You may want to consider whether you should carry back or leave it for future years. This would depend on the tax rates. For example, if you paid income tax at the small business rate of 15% in the prior year but you know that the next year you will not be getting the small business rate and will be paying at 26% then it would be more advantageous to carry forward the loss and use it in next year.
In addition, if you had a good year this year and you know that the following year will be a bad year, rather than paying out current year profit in salaries/bonus to reduce net income, you leave it in the company or pay out dividends and then in the following year you incur a loss in which you can then carry back and recoup some of the taxes paid.
Chart summary of the differences: