What is a business loss? Legal and tax implications in Quebec
Definition
A business loss occurs when the deductible expenses of a business exceed its income for a tax year. For tax purposes it becomes a non-capital loss that can be used against other income.
Using the loss
- a sole proprietor deducts it from their other income for the year (employment, investment);
- an unused non-capital loss may be carried back 3 years or carried forward 20 years (s. 111 Income Tax Act; similar rules in Quebec);
- a corporation’s losses remain in the corporation and cannot be deducted by shareholders.
Allowable business investment loss (ABIL)
When a shareholder or creditor loses money invested in shares or loans of a Canadian-controlled small business corporation that becomes bankrupt or insolvent, half of the loss may be deducted from all sources of income (s. 39(1)(c) ITA).
Restrictions
- after an acquisition of control of a corporation, losses can only be used against income from the same or a similar business carried on with a reasonable expectation of profit (s. 111(5));
- a “hobby” activity without a commercial character does not generate deductible losses.
Legal consequences
Repeated losses can lead to insolvency: directors must then consider the interests of creditors and may face personal liability for unremitted source deductions and taxes.
