What happens for tax if I sell my business at a loss?

A sale at a loss is not automatically a tax refund. Canadian rules sort losses into categories, and each category has its own limits on what income it can be applied against and in which years. Two owners with identical economic losses can end up with very different relief depending on structure and on how the loss arose.

Capital losses on a share sale

If you sell shares for less than their adjusted cost base, the result is generally a capital loss. Allowable capital losses can normally be applied against taxable capital gains in the year, carried back a limited number of preceding years, and carried forward indefinitely. They generally cannot be applied against employment or ordinary business income. That restriction is what makes many capital losses less useful than owners expect, particularly if you have no other gains.

Business investment losses are treated better

Where the loss arises on shares of, or a debt owing by, a small business corporation, it may qualify as a business investment loss. The allowable portion can generally be applied against all sources of income, not just capital gains, which is substantially more valuable. The conditions are specific — they concern the nature of the corporation, arm’s-length status, and in the case of debt, that it has genuinely become uncollectable. Claiming this relief also reduces the amount of lifetime capital gains exemption available to you later.

Losses inside an asset sale

• Where a class of depreciable property is emptied and its remaining undepreciated balance exceeds the proceeds, a terminal loss is generally deductible against business income.
• Selling inventory below cost generally affects ordinary business income directly.
• Losses on non-depreciable capital property, such as land, are generally capital losses with the usual restrictions.
• A corporation with unused non-capital losses may carry them back or forward within statutory limits, but an acquisition of control can restrict their use.

Rules that can deny a loss outright

Superficial loss rules can deny a capital loss where you or an affiliated person reacquire the same or identical property within a defined window around the sale. Similar stop-loss rules apply to transfers between related parties and to certain corporate transactions. If you are selling to a person or entity connected with you, assume there is a rule in play and get advice before completing. Document the loss carefully; the CRA will look at whether the disposition was genuine and at how the value was determined.