Losses and How to Claim Them on Your Taxes

To help offset the financial burden of different losses, the Canada Revenue Agency allows taxpayers to write off losses against portions of their income.

There are three major categories of losses:

• rental losses
• capital losses
• business losses.

The CRA defines each of these losses differently and has a unique procedure for writing off each one. One important distinction to keep in mind throughout: rental losses and business losses can generally be applied against any source of income you have - employment income, investment income, other business income, and so on. Capital losses are more restrictive and can only be applied against capital gains.

Rental Losses

If you rent out a home, an apartment, a room in an office, or another type of rental property, you are required to declare the money collected as income.

However, if your expenses such as advertising, maintenance, and insurance exceed the amount of rent you have collected, you can claim a rental loss. For example; if you collect $12,000 in rent over the course of the tax year but you spend $15,000 in expenses, you can declare a rental loss of $3,000. Because a rental loss is not a capital loss, you can apply it against any other income you earned that year, and in some cases you can carry it back and claim it against a previous year's income. 

To calculate your rental losses, you must fill out Form T776 — Statement of Real Estate Rentals. This form includes sections for you to enter the amount of rent collected and relevant expenses, thereby helping you to calculate your losses.

If you have rented out your property to a relative for less than fair market rent, you do not have to declare that rental income in most cases. However, you also cannot claim a rental loss.

Additionally, if you have unpaid rent owed to you at the end of the tax year, you may deduct the unpaid rent from your gross rental income. In order to claim unpaid rent, you must have proof that you attempted to collect the rent without success.

Capital Losses

If you sell capital property such as land, jewelry, securities or a range of other items at a loss, you may be able to claim a capital loss on your taxes. Unlike rental or business losses, capital losses from these properties have to be applied against capital gains from the same categories - they cannot be used to offset employment, business, or other income. If there is no gain in current year, loss can be carried back up to 3 years to the year that had gain, or carried forward indefinitely in anticipation of a future gain.

Calculating your capital loss is fairly straightforward. Simply take the proceeds of the disposition (amount you received), and subtract the property’s adjusted cost base and any expenses incurred in selling it.

The adjusted cost base of a property is the cost you paid for the property plus legal fees, commissions and other expenses incurred to purchase it. For example, if you sold a capital asset for $100,000 with an adjusted cost base of $105,000 and you spent $400 advertising the sale, your capital loss would be $5,400.

However, you cannot necessarily claim that amount as a loss. Every year, the CRA sets an inclusion rate defining how much of your capital gains or losses can be reported. The capital gains inclusion rate is one-half. In this example, you would be able to claim $2,700 in capital losses from your loss of $5,400.

If the transaction was done with foreign currency, you can use the same formula to calculate your capital loss. However, instead of calculating the amount you can claim and converting the foreign currency into Canadian dollars, you must convert each value of the formula using the exchange rate the day the particular transaction took place, and then do the subtraction.

To claim capital losses, complete Schedule 3 of your return and transfer the amount to line 12700 of your Income Tax and Benefit Return.

If your capital loss exceeds your capital gains for the year, you may carry the loss back to one of the three previous years. To apply for a loss carryback, you must include a Form T1A Request for Loss Carryback with your return. Most tax preparation software, such a TurboTax, generates this form automatically based on your losses. You do not have to send in amended returns for the years to which you want to apply the extra loss.

Business Losses

If your business expenses exceed your business income for the year, you have a net business loss. You calculate this on Form T2125 - Statement of Business or Professional Activities, which flows through to your T1 return.

Like a rental loss, a business loss is not restricted to offsetting the same type of income. You can apply it against any other income you have in the same year, employment income, investment income, a spouse's income in some cases, and so on.

If your business loss is larger than all of your other income for the year, the unused portion becomes a non-capital loss. A non-capital loss can be carried back up to 3 years to reduce tax paid in an earlier year, or carried forward up to 20 years to offset future income. This is different from a capital loss, which can only ever be applied against capital gains, a non-capital loss can be applied against any type of income in the year it's used.

Business Investment Losses ABIL

An Allowable Business Investment Loss (ABIL) is a specific type of business loss with its own rules, arising when you suffer a loss from either unpaid debt owed to you by a small business corporation, or from selling (or disposing of, even for nothing) shares in a small business corporation. Neither of these items need to have been disposed of for cash to qualify. 

In order to qualify, the debt must be considered bad or unrecoverable at the end of the tax year. Alternatively, if you are claiming a business investment loss for shares, the small business corporation must have gone bankrupt, be insolvent, be in the process of winding up, or have no fair market value.

As with other business losses (and unlike capital losses), your allowable business investment loss can be applied against any of your sources of income, not just capital gains. If your loss is more than all of your other income, the difference can be carried forward or back as a non-capital loss, the same as a regular business loss Complete Chart 6 of the T4037 Capital Gains form to determine the loss amount, then report the loss on line 21699 and line 21700. Report the total ABIL on line 21699, and report the allowable portion to claim based on your income on line 21700.

TurboTax Premier offers an easy step-by-step guide to report your investment income and claim your losses or carry it to another tax year. TurboTax Self-Employed helps you easily manage your rental and business earnings, expenses, and claim the losses. However, if you feel a bit overwhelmed, consider TurboTax Assist & Review, Self-Employed, and get unlimited help and advice as you do your taxes, plus a final review before you file. Or, choose TurboTax Full Service for Self-Employed^* and have one of our tax experts do your return from start to finish.

*TurboTax Full Service is not available in Quebec.