Self employed Business, Professional, Commission, Farming, and Fishing Income: Chapter 6 – Losses

From: Canada Revenue Agency

farm icon Farm losses

fish icon Fishing losses

farm icon Farm losses

When your farming business expenses are more than the farming business income in a year, you have a net loss. However, before you can calculate your net farm loss for the year, you may have to increase or decrease the loss by certain adjustments explained in Line 9941 – Optional inventory adjustment included in 2018 and Line 9942 – Mandatory inventory adjustment included in 2018.

If you show a net farm loss for the year, read this chapter for information on how to treat your loss. For more information on farm losses, see Income Tax Folio S4-F11-C1, Meaning of Farming and Farming Business.

The amount of the net farm loss you can deduct depends on the nature and extent of your business. Your farm loss may be one of the following:

  • fully deductible
  • restricted (partly deductible)
  • non-deductible

Non-deductible farm losses

If you did not run your farm as a business, you cannot deduct any part of your net farm loss.

The size and scope of your farm may make it impossible for the farm to make a profit, either now or in the near future. In this case, you cannot deduct your farm loss. We consider this kind of farm to be personal. Therefore, any farm expenses are personal expenses.

Fully deductible farm losses

If you made your living from farming, we consider farming to be your main source of income. As long as farming was your main source of income, you can deduct the full amount of your net farm loss from other income. Farming can still be your main source of income even if your farm did not show a profit. Other income could come from investments, part-time employment, and so on.

To determine if farming was your main source of income, you need to consider such factors as:

  • gross income
  • net income
  • capital invested
  • cash flow
  • personal involvement
  • your farm's ability to make a profit (both actual and potential)
  • plans to maintain or develop your farm and how you carried them out

Although you may have been a partner in a farming business, you still have to determine if farming was your own main source of income.

When farming is your main source of income and you show a net farm loss in 2018, you may have to reduce the loss when you have other income in 2018. Any loss that is left is your farm loss for 2018.

Example

Rick's farming business, which is his main source of income, has a December 31 fiscal year-end. His farm loss before adjustments is $50,000. He wants to reduce his loss by the optional inventory adjustment (OIA). Rick kept the following records for 2018:

Net farm loss before adjustments
$50,000
Optional inventory adjustment
$15,000
Other income
$2,000

To reduce the loss amount, Rick adds back his OIA. He determines his farm loss for 2018 as follows:

Farm loss before adjustments
($50,000)
Add optional inventory adjustment
$15,000
Farm loss after adjustments
($35,000)
Add other income
$2,000
Farm loss for 2018
($33,000)

Applying your 2018 farm loss

You may have a farming loss in 2018. If you do, you can carry it back for up to 3 years or carry it forward for up to 20 years for all non-capital losses incurred after 2005. In both cases, you can deduct it from all your sources of income in those years.

If you choose to carry back your 2018 farm loss to your 2015, 2016, or 2017 income tax returns, fill in Form T1A, Request for Loss Carryback. Attach the completed form to your 2018 income tax and benefit return or to your request for an adjustment and send it to your tax centre. You can also send the form on its own. Do not file an amended return for the year to which you apply the loss.

Applying your farm losses from years before 2018

The 20 year carry forward is only allowed for losses starting January 1, 2006 and onward. You may be able to apply farm losses you had in any year from 2006 to 2017 on your 2018 income tax return. You can apply these losses if you did not already deduct them, and you have net income in 2018. To apply these losses to 2018, you have to apply the loss from the earliest year first. Enter the amount you wish to deduct on line 252 on your income tax return.

Restricted farm losses (partly deductible)

You may have run your farm as a business. For your farm to be considered a business, you must have carried on activities with the intention of making a profit and there must be evidence to support that intention.

However, if farming was neither your main source of income (for example, you did not rely on farming alone to make your living) nor was it your main source of income in addition to some other subordinate source of income (for example, where the other source of income was a side-line employment or business) you may only be able to deduct a part of your net farm loss.

Each year you have a farm loss, review your situation carefully to see if farming was either your main source of income or it was your main source of income in addition to some other subordinate source of income. It is important to do this, since a farming loss may be restricted in one year, but not in another year.

How to calculate your restricted farm loss

If farming was neither your main source of income nor your main source of income in addition to some other subordinate source of income and you had a net farm loss, the loss you can deduct depends on the amount of your net farm loss.

For tax years that end after March 20, 2013, the annual maximum deduction used in the calculation for restricted farm losses is $17,500.

When your net farm loss is $32,500 or more, you can deduct $17,500 from your other income. The rest of your net farm loss is your restricted farm loss.

When your net farm loss is less than $32,500, the amount you can deduct from your other income is the lesser of:

  1. your net farm loss for the year
  2. $2,500 plus 50% × (your net farm loss minus $2,500)

The amount remaining is your restricted farm loss.

Note

When the farm loss you deduct is different from your actual farm loss because of the restricted farm loss calculation, you should indicate this on your income tax return on line 168, "Farming Income." For example, you can do this by noting "restricted farm loss," "RFL," or "Section 31" to the left of line 168.

Example

Sharon ran a cattle farm with the intention of making a profit. However, farming was neither her main source of income, nor her main source of income in addition to some other subordinate source of income in 2018. In 2018, she had employment income and a net farm loss of $9,200, which she calculated on line 9946 of Form T2042.

The part of Sharon's net farm loss that she can deduct from her other income in 2018 is either amount A or B, whichever is less:

  1. $9,200
  2. $2,500 plus 50% × ($9,200 − $2,500)
    $2,500 plus 50% × $6,700

Therefore, B = ($2,500 + $3,350) = $5,850.

Because Sharon can only deduct either A or B, whichever amount is less, she enters $5,850 on line 141 of her income tax return and deducts this amount from her other income in 2018. Her restricted farm loss is the amount that remains, which is $3,350 ($9,200 minus $5,850). Sharon prints "Section 31" to the left of line 168 on her income tax return to show that the loss she is deducting is the result of a restricted farm loss calculation.

Applying your 2018 restricted farm loss

You can carry back your 2018 restricted farm loss up to 3 years. You can also carry it forward up to 20 years.

The amount you deduct in any year cannot be more than your net farming income for that year. If you have no net farming income in any of those years, you cannot deduct any restricted farm loss.

To carry back your 2018 restricted farm loss to your 2015, 2016, or 2017 income tax returns, use Form T1A, Request for Loss Carryback. Attach the completed form to your 2018 income tax and benefit return or to your request for an adjustment and send it to your tax centre. You can also send the form on its own. Do not file an amended return for the year to which you would like the loss applied.

Applying your restricted farm losses from years before 2018

The 20 year carry forward is only allowed for losses starting January 1, 2006 and onward. If you have net farming income in 2018, you may be able to apply restricted farm losses you had in any year from 2006 to 2017 on your 2018 income tax return. You can apply these losses as long as you did not already deduct them from your farming income. Also, you can only apply them up to the amount of your net farming income in 2018. You have to apply the loss from the earliest year before you apply the losses from other years. Claim this amount on line 252 of your income tax return.

You may have sold farmland at a time when you had restricted farm losses you did not claim. When this happens, you may be able to reduce the amount of your capital gain from the sale. In this case, see Restricted farm losses (partly deductible).

fish icon Fishing losses

When your fishing business expenses are more than the fishing business income in a year, you have a net loss. If your net loss from fishing is higher than your other income in the current year, you will be able to carry back or carry forward the balance to reduce your taxes in other years. For example, in 2018 your fishing income was $18,000 and your total fishing expenses were $25,000. Therefore, your net loss from fishing was $7,000 [$18,000 $25,000 = ($7,000)]. Also, you had employment income of $2,000. To check if you are able to carry back or carry forward part of this loss, you subtract your other income from your net loss from fishing ($7,000 $2,000 = $5,000). In this example, you would be able to carry back or carry forward a loss of $5,000.

You may have net fishing income in 2018 instead of a fishing loss. If so, you may be able to apply to your 2018 income tax return fishing losses you had from 2006 to 2017. You can apply these losses as long as you did not already deduct them. You have to apply the loss from the earliest year first before you apply the losses from later years. Enter the amount on line 252 of your income tax return.

You may have a fishing loss in 2018. If you do, you can carry back this loss for 3 years or carry it forward for up to 20 years. To carry back a 2018 loss, fill in Form T1A, Request for Loss Carryback. Attach the completed form to your 2018 income tax and benefit return or to your request for an adjustment and send it to your tax centre. You can also send the form on its own. Do not file an amended return for the year to which you want to apply the loss.

Non-capital losses

You may have incurred a loss in 2018 from a business other than farming or fishing. If this loss is more than your other income for the year, you may have a non-capital loss. Use Form T1A, Request for Loss Carryback to calculate your 2018 non-capital loss.

You can carry back your non-capital loss up to 3 years. You can carry forward non-capital losses incurred before March 23, 2004, up to 7 years. Non-capital losses incurred after March 22, 2004, and before 2006 can be carried forward 10 years. Non-capital losses incurred after 2005 can be carried forward up to 20 years.

If you choose to carry back your 2018 non-capital loss to your 2015, 2016, or 2017 income tax returns, fill in Form T1A. Attach the completed form to your 2018 income tax and benefit return or to your request for an adjustment and send it to your tax centre. You can also send the form on its own. Do not file an amended return for the year to which you apply the loss.

For more information about non-capital losses, see Interpretation Bulletin IT-232R3, Losses – Their Deductibility in the Loss Year or in Other Years. You can view carryover amounts using My Account for Individuals or Represent a Client.

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