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Use of Non-Capital Assets

September 4, 2013

Tax Question:

How do I use my company’s non-capital losses?

Facts:

Non-capital losses are business losses incurred when expenses exceed income in any given year. The non-capital loss that results for tax purposes can be carried back up to three years to recover previous taxes paid or carried forward up to twenty years to reduce future taxable income and taxes payable.

Discussion:

When is it advantageous to carry the loss back?

It is advantageous to carry the non-capital loss back and recover previous taxes paid in the following situations:

  • If tax rates were higher in past years than they are expected to be in future years as this will maximize the refund.
  • If you do not expect to have profits in the coming years.
  • When you are considering amalgamating or selling the company in the near future. There are restrictions to the use of losses after a sale or amalgamation so it may be better to utilize them before the event occurs.
  • For cash flow purposes. You may want the extra cash now for an investment opportunity; as the old adage goes, a bird in the hand is often worth two in the bush.

You have to make a decision in the year of the loss if you want to carry it back. If the loss remains unused in the year it occurs then it can only be carried forward.

When is it advantageous to carry the loss forward?

If your corporate tax rates are expected to increase in the future, you may receive a larger tax savings by carrying the loss forward. Tax rates can increase by way of legislated rate increases or, your business may be such a success it has outgrown the small business deduction and will be subject to high rate corporate tax in the future. In most cases, non-capital losses can be applied against any type of income. So if you are expecting large profits in future years, maybe as a result of a gain on the sale of a capital asset, carrying the loss forward will help reduce the tax impact in those future years.

If you would like more information on this topic, please contact a member of the Empire CPA team by filling out the contact form below.

Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. Empire, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.

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