Business Losses
How a business loss reduces your other income, and how to carry it back 3 years or forward 20.
The short version
- A real business loss reduces your other income in the same year: employment, pension, investment income, all of it. That can mean a refund of tax withheld from your paycheque.
- If the loss is bigger than your other income, the unused part is a non-capital loss. You can carry it back 3 years (form T1A) or forward 20 years (line 25200).
- The business has to be a real business: an activity carried on for profit, in a commercial way. Hobbies don't produce deductible losses.
- Repeated losses, especially against a good salary, are a common reason for a CRA review. Records and a believable path to profit are what get you through it.
- Some losses have their own rules: farming losses can be restricted, and the home office deduction and rental CCA can't create a loss.
Business Losses and Your Tax Return
Every business has a bad year, and plenty of them have a bad first three. The tax system is surprisingly decent about it: a genuine business loss comes off your other income, so the year your new venture lost money is often the year your tax refund went up. That's also why CRA looks carefully at losses, particularly when a well-paid employee has a side business that loses money every year with remarkable consistency.
How a Business Loss Reduces Your Tax
Your net business income or loss comes from line 9946 of form T2125 and goes on line 13500 (or 13700 or 13900) of your return as a negative number. It then reduces your total income, along with employment and everything else.
| Example: Ontario, 2026 | Amount |
|---|---|
| Employment income (T4) | $70,000 |
| Business loss, first year of a side business | ($8,000) |
| Net income | $62,000 |
| Income tax saved by the loss (approximate) | about $2,250 |
The saving comes back as a refund, because your employer withheld tax as if you earned the full $70,000. What counts in a first year: start-up expenses. Your marginal tax rate decides how much each dollar of loss is worth. CPP and EI on the salary don't change.
What is my business loss worth?
Enter your other income, province and the business loss. The assistant estimates the refund, tells you whether any of the loss is left to carry over, and what CRA may ask to see.
When the Loss Is Bigger Than Your Other Income
If the business loss wipes out all your other income, the unused part becomes a non-capital loss. You choose where it goes:
| Option | How | Best when |
|---|---|---|
| Carry back up to 3 years | Form T1A, filed with this year's return. Don't amend the earlier returns yourself. | You paid tax in those years, especially at a high rate. It brings a refund now. |
| Carry forward up to 20 years | Claim on line 25200 in a later year | The business should be profitable soon, or recent years were low-income anyway. |
You can split a loss: some back, some forward, in the amounts you pick. Keep a running schedule; CRA tracks your balance, but your notice of assessment is easier to check when you know the number. See notice of assessment explained.
The Real Business Test
A loss is deductible only if the activity is a business. Since the Supreme Court of Canada's 2002 decision in Stewart v. Canada, the question is whether you carry it on in pursuit of profit. For an activity with no personal or recreational element (a plumbing company, a bookkeeping practice), that's usually obvious. When there is a personal element (horses, a boat charter, art, a vintage car hobby that sells the odd part), CRA and the courts look at whether it's run in a commercial way: business plan, records, pricing, marketing, time spent, your training, the profit and loss history, and whether you changed course when it kept losing. The full test is on hobby vs business for tax purposes.
Losses CRA Looks at Twice
- Years of losses with no change in approach. One or two bad years are normal; ten in a row with the same plan look like a hobby.
- Personal expenses dressed as business. The family vehicle, the home, the trip that had one meeting. Personal costs claimed as business expenses are the usual source of a loss CRA reverses. See business expense deductions.
- Losses that only exist because of CCA. Legal, but expect a question. See capital cost allowance explained.
- Farming losses. If farming isn't your main source of income, losses can be restricted: the deductible amount is capped at $17,500 a year (the first $2,500, plus half of the next $30,000), with the rest carried forward against farming income only.
Expenses That Can't Make a Loss
Business-use-of-home expenses can reduce business income to zero but not below; any extra carries forward to next year's business income. See home office expenses. CCA on rental property can't create or increase a rental loss either, though ordinary rental expenses can. And a capital loss (selling an investment for less than you paid) is a different animal entirely, deductible only against capital gains.
CRA denied your business loss?
If a reassessment removed your loss or called your business a hobby, you have 90 days from the notice date to object. The SmartFile builds the objection with the evidence that usually matters.
How to Protect a Loss Before CRA Asks
- Keep the business separate. A separate bank account and card, so every transaction tells its own story.
- Write a short business plan, with prices, target customers and when you expect a profit. Update it when things change.
- Track your time and marketing. Proof that you actively tried to sell is often what wins these cases.
- Register where required. A GST/HST account, a business name, licences: the things a business does. See the GST/HST small supplier rule.
- Keep receipts six years from the end of the year they relate to. Losses carried forward need the records kept until the loss is used, plus the normal period. See what receipts to keep.
CPP and Business Losses
CPP on self-employment is based on net self-employment earnings. A loss from one business can offset profit from another for CPP, but it doesn't reduce the CPP already deducted from your salary. If you also had a profitable business, run the numbers on the self-employed tax calculator.
Before you file, Return Check looks at a business loss the way a CRA reviewer would and flags the expense lines most likely to be challenged.
Business Loss Questions
Can a business loss reduce my employment income?
Yes. A loss from a genuine business is deducted from your other income in the same year, including employment income, which can produce a refund of tax withheld from your pay.
How many years can I carry a business loss forward?
Non-capital losses from tax years ending after 2005 can be carried forward 20 years and carried back 3 years.
How do I carry a business loss back?
File form T1A, Request for Loss Carryback, with your return for the year of the loss. Do not file amended returns for the earlier years.
How many years of losses before CRA calls it a hobby?
There is no fixed number. CRA looks at whether the activity is carried on for profit in a commercial manner, including your records, business plan, effort and whether you changed approach after losses.
Can my home office expenses create a business loss?
No. Business-use-of-home expenses can reduce business income to zero but not create or increase a loss. The unused amount carries forward.
Sources: CRA, Line 25200 Non-capital losses of other years; Guide T4002, Chapter 1; Supreme Court of Canada, Stewart v. Canada, 2002 SCC 46. Checked October 2026. The tax saving is estimated with our 2026 Ontario rules engine. The restricted farm loss figures are from the Income Tax Act as amended in 2013; we did not find a 2026 change, but confirm with a professional if farming is involved.
Last reviewed October 5, 2026 against CRA and Government of Canada sources. How we check our facts.