Loss carryback
A loss carryback applies a loss from one tax year against income of earlier years. Paragraph 111(1)(a) of the Income Tax Act lets a taxpayer deduct non-capital losses of the three following years in computing taxable income, and a corporation requests the carryback on Schedule 4.
Sellers with a loss year before a sale meet this term when asking whether the loss can reach earlier profits. Paragraph 111(1)(a) lets a taxpayer deduct non-capital losses for the 20 taxation years before the year and the three taxation years after it, and paragraph 111(1)(b) allows net capital losses of the three following years. Both are subject to the limits in subsection 111(3) and the loss restriction event rules in subsections 111(4) and 111(5). See whether loss carryforwards survive a share purchase.
How a corporation requests it
The CRA’s T2 guide says to use Schedule 4 to request the carryback of any losses to prior years, and that a current-year non-capital loss can reduce income or Part IV taxable dividends for the three previous years. It also says that after an acquisition of control, special rules apply to non-capital losses.
What to ask
- Whether the loss is a non-capital loss or another type
- Whether a carryback request was filed, and which earlier years it reaches
- Whether the sale will be an acquisition of control that restricts the loss
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Government of CanadaGovernmentIncome Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
- 02Canada Revenue AgencyGovernmentT2 Corporation – Income Tax Guide – Chapter 3: Page 3 of the T2 return
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