What to take away
- A business loss is entered in brackets on your return and generally reduces your other income for the year.
- The activity has to be a business run in a sufficiently commercial way, not a personal endeavour.
- A loss larger than your other income can usually be carried back 3 years or forward 20 years.
- Capital losses, farming and fishing losses, and corporate losses follow different rules.
How a business loss reduces other income
If you carry on a business as a sole proprietor, you report the result on Form T2125 and carry the net figure to the self-employment lines of your return. The CRA tells filers with a loss to show the amount in brackets. A person who also had employment income, interest or other income in the same year will generally see the loss netted against it, which lowers the income that is taxed.
Because the loss usually reduces tax on the other income, it can matter a great deal to someone who has a salary and a new side business. It also means the claim is worth reviewing carefully. A loss that is overstated, or that comes from an activity that is not a business, is the kind of position a reviewer is likely to question.
First question: is it a business?
The CRA separates commercial activities from personal endeavours. An activity can have personal aspects and still be a business if it is pursued in a sufficiently commercial and business-like manner. The CRA’s folio for artists and writers, which applies a general principle, says there must be a subjective intention to profit supported by evidence of business-like behaviour.
Factors it lists include the time you devote, how you promote the work, the revenue you receive, your training and your history of profits or losses over a number of years. No single factor decides the question. A hobby that never earns revenue, has no marketing and is mostly a source of enjoyment is a poor candidate for a loss claim, however large the receipts look.
Confirm the loss is a real loss
Before you think about using a loss, check how it was created. Personal costs mixed into the business, vehicle expenses without a logbook, and home costs claimed in full are common causes of an inflated loss. Our articles on vehicle expenses and on home office expenses for the self-employed explain two of the areas that attract questions.
One limit is built into the home office claim. The CRA says business-use-of-home expenses cannot be used to create or increase a business loss, so in a loss year the deduction is capped and the unused part is carried forward. If you use capital cost allowance, ask whether claiming it in a loss year makes sense, because the choice affects the result and later years.
When the loss is larger than your other income
If the loss is bigger than your other income for the year, the CRA describes the excess as a non-capital loss. Generally, a non-capital loss comes from employment, property or a business. For losses arising in a tax year ending after 2005, you can generally carry the amount back 3 years and forward 20 years. A non-capital loss that comes from an allowable business investment loss has shorter limits.
To use a loss in a later year, you deduct the unapplied amount on line 25200 of your return. To carry it back, you complete Form T1A, Request for Loss Carryback, and file it with your return or separately. The CRA says not to file an amended return for the year you want to apply the loss to. Your notice of assessment usually shows available losses, so check it before relying on a figure.
Carryback or carryforward
You may be able to choose how a non-capital loss is used, and the better option depends on the tax you paid or expect to pay in each year. A carryback can reduce the tax assessed for an earlier year. A carryforward keeps the loss for a year when your income, and your tax rate, may be higher. A start-up that expects profit to grow may prefer to wait. A person whose income was high in a recent year may prefer to go back.
Illustrative example with round numbers: suppose you earned $10,000 of other income in a year and your business lost $15,000. In simplified terms, the loss offsets the $10,000 and leaves $5,000 of non-capital loss to carry to another year. Your real calculation also involves other deductions and credits, which is why the T1A and your return should be prepared with care.
Losses that do not work this way
A capital loss cannot be deducted from other sources of income. The CRA says an allowable capital loss is applied against taxable capital gains, and any excess becomes a net capital loss that can be carried back 3 years or forward to a later year. An allowable business investment loss has its own treatment, and the line 25200 page explains how an unused one can eventually become a net capital loss.
Farming and fishing have separate restricted-loss rules, and the CRA points those filers to its farming and fishing guides. Limited or non-active partners report income and losses on different lines of the return. Tax shelters have their own conditions. A corporation’s loss is tracked on its own return using Schedule 4, and it is not a loss of the shareholder.
Records to keep and when to get help
Keep the working papers behind each expense, a record of how you run the activity, and copies of your notices of assessment. If you are claiming a loss in the first years of a business, a short note on your plan and marketing helps support that the activity is commercial. If the CRA asks, a clear file answers most of the question.
Bring your T2125, your other income slips and any earlier losses to an accountant if the loss is large, if you have run losses for several years, or if you are unsure whether the activity is a business. Our guide to T2125 working papers and the self-employed basics guide are good preparation, and the personal tax and tax advisory services can help with the decision.
Sources & editorial notes
Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.
- Lines 13499 to 14300 – Self-employment incomeCanada Revenue Agency
- Line 25200 – Non-capital losses of other yearsCanada Revenue Agency
- Form T1A, Request for Loss CarrybackCanada Revenue Agency
- Income Tax Folio S4-F14-C1, Artists and WritersCanada Revenue Agency
- Business-use-of-home expensesCanada Revenue Agency
- Capital lossesCanada Revenue Agency
- T4012, T2 Corporation – Income Tax Guide: Chapter 3, Page 3 of the T2 return (Schedule 4 losses)Canada Revenue Agency
Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.