If you have a farm loss, the Canada Revenue Agency allows you to claim it against your income and carry it forward or backward to returns from other years. It’s important to know how to calculate your loss and to understand when you can carry it forward or backward.
Defining Farm Losses
A farm loss occurs when your farm business expenses for the year exceed your income. You can claim this loss as a non-capital loss on line 14100 of your income tax return (T1) . This amount is subtracted from your net income to determine your taxable income, and helps to lower the amount of tax that you owe.
In some cases, you cannot claim your entire loss. You may need to adjust your losses based on factors such as your inventory, and whether or not farming is your primary source of income.
Inventory Adjustments
If you claimed a mandatory or optional inventory adjustment in the previous tax year, you need to adjust your farming expenses accordingly. When calculating your farm loss, deduct the inventory adjustment from your previous year’s tax return as a business expense for the current year.
You can find the inventory adjustment amount on line 9941 or 9942 of your previous year’s T2042 – Statement of Farming Activities.
Restricted Losses
In order to claim all of your farm losses, you must be a full-time farmer. If farming was not your primary source of income, you can only claim a portion of your losses.
If your farm losses exceed $32,500 and you are a part-time farmer, you can claim $17,500 as a farm loss against income for the year. If your farm losses are less than $32,500, the CRA requires you to complete this formula: $2,500 +.5 × (your net farm loss – $2,500).
You may claim a loss equal to the lesser of the result of that equation and your actual farm losses.
For example, if your farm losses are $20,000, the result of $2,500 + .5 x ($20,000 – $2,500) is $11,250. Because $11,250 is less than your farm losses, that is the amount you report as your loss.
Any unclaimed loss becomes part of your net farming loss. You can carry these losses backward three years or forward up to 20 years.
Carrying Losses Backward
To use a current farm loss to offset income in one of the three previous years, fill out form T1A – Request for a Loss Carryback, and attach it to your tax return. Once the loss is applied to your previous year’s income, it can decrease your tax owed or result in a refund. It cannot, however, change your benefits eligibility retroactively.
Carrying Losses Forward
To apply farm losses from previous years to your current year’s income tax return, check your unclaimed losses balance from your last notice of assessment or your CRA My Account. Transfer the losses to line 25200 of your current income tax return.
Only farm losses suffered after 2005 can be carried forward 20 years. If you have losses incurred in 2005 or earlier, they can only be carried forward ten years, meaning you cannot apply these older losses to your current year’s tax return.