If you have a business or property loss that wipes out all of your income for the year, you report taxable income on your income tax return as zero.
What happens if the CRA audits you some years later and decides that you claimed too much loss?
For a regular assessment of tax, there is a “three-year clock” that starts running as soon as the CRA issues your original assessment for the year.
For example, suppose you filed your 2017 return on April 4, 2018 and you received a Notice of Assessment dated April 19, 2018. The CRA cannot reassess you to change your 2017 taxable income after April 19, 2021. (This limitation does not apply in cases of fraud, carelessness, neglect or wilful default, or if you sign a waiver before the deadline.)
But what if you had a business loss in 2017, reported zero taxable income and zero tax, but also had a $50,000 loss carryforward to claim in a later year? And suppose the CRA decides, many years later, that the $50,000 loss in 2017 shouldn’t be allowed?
The three-year clock will not start running for a loss, since your “assessment” — i.e., zero tax for 2017 — does not need to be changed if the CRA disallows the loss carryforward claim for a later year. Thus, for example, if you claim the $50,000 loss from 2017 on your 2021 return filed in April 2022, the CRA can reassess you to deny the claim, any time up to the reassessment deadline for your 2021 return (normally sometime in 2025), rather than only until April 2021, as would be the case for your 2017 return.
There is a way to prevent this, however, and to start the clock running. Once you receive your “nil assessment” for a year in which you pay no tax, write to the CRA and request a determination of loss under Income Tax Act subsection 152(1.1). The CRA will usually comply and issue the determination fairly quickly. Once it is issued, the date on the Notice of Determination starts a three-year clock running for any redetermination. If the three years run out, then your loss is guaranteed and (subject to exceptions for fraud etc. as mentioned above) you can be sure of being able to carry it forward and claim it in a future year. Business losses can be carried forward up to 20 years.
So, if you have nil taxable income for the year and a loss carryforward, request a “determination of loss”.