The Canada Revenue Agency allows you to report capital losses as income deductions on your tax return, but it only allows you to claim them against capital gains. Many other types of losses, however, can be claimed differently, and in some cases, even the way you claim a capital loss can vary depending on the exact type of loss.
A capital loss occurs when you sell an asset (buildings, land, shares, art, etc) for less than the total of its purchase price and any capital improvements you made to it. Whether you own the capital property personally or for business, the CRA allows you to write off your loss against any capital gains you are reporting for that year.
If you don’t have capital gains for the current tax year, you can carry your capital loss back three years or forward indefinitely. However, it’s important to note there are a few exceptions to the rule as well as other types of losses that can be claimed more broadly.
If you are a sole proprietor or if you own a business with a partner, you can claim business losses against other types of income. If your business expenses for the year exceed your income, the CRA wants you to record your loss on your income return. There, it is directly subtracted from any other income you report that year.
For example, if you own a plumbing business and you experience losses, you can claim your loss against the income you earn from your part-time job, your rental property or any other source.
However, you cannot carry these losses forward or backward. In contrast, if you invest in another person’s business, you may be able to apply your losses to other years’ returns.
Allowable Business Investment Loss
Allowable Business Investment Losses occur when you lose money in a qualifying investment such as small business shares. These losses are considered capital losses, but the CRA gives you more leniency in how you can apply them.
Namely, you can carry them back three years and forward ten years, and during that time period, you can claim them against any type of income. If you have not claimed them by the eleventh year, they revert to regular capital losses, and you may only claim them against capital gains in the years going forward.
If you own a farm and your annual income exceeds your expenses, you can claim these losses against your income. However, if farming is not your main income source, the CRA only allows you to claim a portion of your losses for the year. The remainder of your losses become Restricted Farm Losses, and they can be applied to future years.
Additionally, if you suffer a capital loss due to the disposition of farm property, it is treated differently than other capital losses. Like ABILs, you can claim these losses against any type of income. You don’t need to claim them against other capital losses, and you can carry them back three years or forward 20 years.
Finally, if you own a rental property and your expenses exceed your income, you have rental losses. You may claim rental losses against any type of income, but the CRA does not offer you a way to carry them forward or back.
However, in order to claim rental losses, you must own your rental property with the objective of earning income. If you rent it below-market-rate to a friend or relative, you cannot claim rental losses.