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.
Thus, for example, if you filed your 2014 return on April 6, 2015 and you received a Notice of Assessment dated April 22, 2015, then the CRA cannot reassess you to change your 2014 taxable income after April 22, 2018. (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 2014, 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 shouldn’t be allowed?
The three-year clock will not start running for a loss, since your “assessment” — i.e., zero tax for 2014 — does not change. Thus, for example, if you try to use the $50,000 loss from 2014 on your 2017 return, the CRA can reassess you to deny the claim, any time up to the reassessment deadline for your 2017 return (sometime in 2021), rather than only until April 2018, as would be the case for your 2014 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 now 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”.