Using Business Losses: How to Carry Losses Back or Forward – A Complete Guide by a Montreal CPA Firm Near You

Using business losses effectively is one of the most powerful tax strategies available to

Canadian entrepreneurs. Whether due to a difficult economic year, startup costs, major

investments, or unexpected expenses, business losses can be used to reduce taxes

owed in past, current, or future tax years. However, many business owners

misunderstand the rules governing non-capital losses, carryforwards, carrybacks, and

allowable business investment losses. Incorrect use can result in reassessments,

missed refunds, and penalties. Understanding how to carry business losses back or

forward in Canada allows companies and proprietors to optimize cash flow, minimize

tax, and stabilize operations during challenging periods. This guide explains the rules

for carrying losses, which losses qualify, how CRA evaluates claims, and how to use

business losses strategically.

Legal and Regulatory Framework

The treatment of business losses is governed by section 111 of the Income Tax Act.

Non-capital losses—primarily generated from business operations—may be carried

back 3 years or forward 20 years to offset taxable income. Losses must be deducted

in a prescribed order depending on the type. Carrybacks require filing Form T1A for

individuals or Schedule 4 for corporations. Certain losses are restricted when a change

of control occurs, and losses may be denied if CRA determines they were not incurred

for the purpose of earning income. Capital losses can offset only capital gains and may

be carried back 3 years or forward indefinitely. Allowable Business Investment Losses

(ABIL) arise when shares or debt in a small business corporation become uncollectible

and receive preferential treatment. These legislative rules form the framework for using

business losses in Canada.

Key Court Decisions

Several court rulings illustrate CRA’s strict interpretation of business losses. In Tonn v.

Canada, CRA denied losses because expenses were deemed personal rather than

business. The court upheld the reassessment, confirming that deductible losses must

relate directly to income-earning activities. In Crabtree Estate v. Canada, the Supreme

Court confirmed that losses must be applied in the correct statutory order and cannot be

arbitrarily assigned to years with the highest tax rate. In Zigomanis v. The Queen, ABIL

claims were denied because the taxpayer could not prove the investment met the

definition of a small business corporation. In McKeown v. Canada, CRA denied losses

artificially generated for tax avoidance. These cases highlight that proper documentation

and legal compliance are essential when carrying business losses back or forward.

Why CRA Targets This Issue

CRA targets business loss claims because losses can significantly reduce taxable

income and create large refunds. CRA reviews:

• losses claimed during years with unusually low revenue

• startups reporting continued losses without proof of commercial intent

• aggressive expenses used to inflate losses artificially

• shareholder loans written off improperly

• ABIL claims lacking supporting documentation

• corporations with loss carryforwards after acquisitions

• losses related to rental or passive activities

CRA ensures that losses claimed are legitimate and tied to actual business operations.

Incorrect loss claims often lead to audits, denied deductions, or penalties.

Understanding CRA’s scrutiny is essential when using business losses in Canada.

Mackisen Strategy

At Mackisen CPA Montreal, we help businesses use losses strategically while

maintaining full compliance. Our process includes:

• analyzing financial statements to confirm which amounts qualify as non-capital losses

• determining the most advantageous years to apply carrybacks or carryforwards

• preparing Form T1A or corporate schedules to request a refund from prior years

• evaluating whether capital losses, ABIL, or non-capital losses apply

• documenting the commercial activity to support loss claims

• assisting with CRA reviews and defending the loss classification

• planning future years to ensure losses do not expire unused

For new businesses, we create long-term tax plans that integrate loss utilization with

growth strategies. This structured approach ensures clients maximize the benefit of

carrying business losses in Canada.

Real Client Experience

A startup consulting firm incurred significant losses in its first year due to software

purchases and marketing costs. We carried the loss back to offset prior employment

income, generating a large refund that improved cash flow. Another corporation

attempted to claim a large non-capital loss, but CRA questioned whether it was a real

business. We provided documentation—contracts, invoices, and operational

records—to prove commercial intent, and CRA accepted the loss. In a third case, a

client invested in a private tech company that later failed. We successfully classified the

loss as an ABIL, resulting in enhanced tax relief. These examples demonstrate the

importance of proper planning and documentation when using business losses in

Canada.

Common Questions

Entrepreneurs often ask whether they must use losses immediately. No—losses may be

carried forward for 20 years, offering flexibility. Others ask whether losses can eliminate

all tax. Yes, up to the amount of taxable income. Some ask whether salary or personal

expenses can create losses. They cannot; only business-related expenses qualify.

Another question concerns corporations with accumulated losses being purchased.

Losses may be restricted after a change of control. These questions show why

understanding the rules for using business losses in Canada is critical.

Why Mackisen

With more than 35 years of combined CPA experience, Mackisen CPA Montreal helps

businesses use losses strategically to reduce tax and improve cash flow. Whether you

need to carry losses back for a refund, carry losses forward to future years, or defend

loss claims during a CRA review, our expert team ensures precision, transparency, and

protection from audit risk.