Under the Income Tax Act, if you have a net loss for the year rather than positive net income, you might not have any other income against which to use that loss in that year. Fortunately, there are “carryover” provisions that allow you to carry the loss back or forward to other taxation years.
Non-capital losses
If you have a loss from employment, a business or property in a taxation year, the losses will reduce your other sources of income in the same year. However, your overall net income cannot be negative. Therefore, your losses from these sources in excess of your positive income from all sources cannot be used in that year. Such losses are called “non-capital losses”.
Non-capital losses can be carried back 3 years or forward 20 years, to offset all other sources of income for those years. If you carry back the losses, there is a special form T1A that is filed to amend the previous tax year’s tax return.
Net capital losses
One-half of your capital losses are called “allowable capital losses” (ACL) and one-half of your capital gains are “taxable capital gains” (TCG). ACLs in a taxation year reduce your TCGs for the year, but only down to zero net TCGs. Any excess ACLs cannot reduce other sources of income in that year.
The excess ACLs for the year, called “net capital losses”, can be carried back 3 years or forward indefinitely, to offset TCGs in those other years. Unfortunately, they normally cannot offset other sources of income. One exception is described immediately below.
Allowable business investment loss (“ABIL”)
An ABIL is a type of allowable capital loss that arises on the disposition of shares or debt in a small business corporation. (Various conditions apply.) Unlike regular ACLs, an ABIL can reduce all sources of income, not just TCGs.
Unused ABILs in a year can be carried back 3 years or forward 10 years to offset all sources of income in those years. After the 10-year carry-forward period, unused ABILs convert to regular ACLs and therefore can only offset TCGs in years beyond that.
Listed personal property losses
There is a general rule that says capital losses from the disposition of personal-use property are deemed to be nil and are therefore not recognized for income tax purposes.
However, if the loss is from the disposition of a “listed personal property” (LPP), the loss can offset gains from disposition of LPP in the same year. If there is a net gain, one-half is a TCG included in income in that year. If there is a net loss, the excess loss can be carried back 3 years or forward 7 years to offset gains from LPP in those years (but not gains from other properties).
LPP includes works of art; rare books, folios, and manuscripts; jewelry; stamps; and coins.