Corporate Tax Loss Example

Using the same information from a previous example, we will explore how tax losses work.

For this scenario, for the first year, let us assume that income = $0 and the expenses were still the same.

For the second year, the company made a net profit of $80 000.

As you can see, in year one, there are no taxes payable because the taxable profit is negative. The total expenses exceed the total income. Instead, the CRA allows a company to carry this loss over to the next tax year. In year two, you can see that the net profit of $80 000 gets further reduced by the $70 000 loss which was carried forward from year one. The advantage of this is that the company in our example ends up paying taxes on $10 000 of taxable income vs $80 000 of taxable income.

This is how you can utilize tax losses to your benefit. In Canada, the CRA allows a corporation to carry a loss forward for up to twenty years before a corporation loses the ability to utilize it. Many new businesses take around five to seven years before they start to generate a sustainable profit. As a business owner, you want to be meticulous with your bookkeeping records to ensure that you are in a position to save taxes once your business is generating sufficient profits.