No one ever wants to make losses when they start a business. However, when filing your taxes, you may realize that your business expenses exceed your business income, which basically means that you will be recording losses on form T2125. But there are ways to write off such business losses.
Are You Employed?
If you have a side business but in regular or full-time employment then one strategy would be to write off the losses your business has incurred against your regular employment income. Having any other source of income allows you to write off the business expenses. Remember that business losses don’t help you much tax wise so it’s always an advantage if you can offset it with your other income.
Can You Write Off Business Losses Every Year?
When you start a business, an expectation is that you will continue to generate more income over the years, reduce losses and eventually become profitable. However, when you continue to report losses year after year and then write them off against your personal income, the CRA can eventually deny your claim. This is because your business is expected to improve in terms of generating profits each year or simply minimizing losses. The CRA may not only deny your claim but also re-assess all the other claims you have made for business losses in previous years.
Are You Running a Legitimate Business?
If you have a side-business then it needs to be commercial in nature. If this is not the case, the CRA may deny your expense claims. For instance, if you buy an aircraft that is intended for business but you are often using it for personal transportation, your claim may be denied when you file losses against your other income. This is especially the case if you have a full-time regular job and you don’t use the aircraft for business to earn income. Therefore, it is important to ensure that any side-business you start is conducted in a commercial manner.
Can You Write Off Losses Against Income for Corporations?
If your business is incorporated then this doesn’t apply. You can only write off business losses from a partnership or sole proprietorship type of business. The best way to offset income for in corporations is to use the non-capital losses by carrying them forward. Losses can be carried forward up to 20 years or backward up to 3 years. This strategy can really help to optimize your tax situation such as in the event that your business becomes more profitable in the following years, carrying losses forward to offset any profits made will work to your advantage.
Don’t raise a red flag with the CRA and attract an audit by being too aggressive when claiming the business expenses. For instance, if you make excessive claims on vehicle expenses, meals and entertainment, you are likely to attract an audit. Partner with a qualified tax accountant to help you understand the best way to report your business losses when filing.
Sohail Afzal, CPA, CMA, MBA
Sohail Afzal, (CPA, CMA, MBA) is the founder & CEO of GTA Accounting Professional Corporation. He is a highly experienced Chartered Professional Accountant and businessman himself and understands the challenges that many businesses face when it comes to cash flow management. As an experienced business consultant & tax advisor, he is helping companies grow by providing the technical, financial, and contractual information necessary for strategic decision-making.