Schedule 4. Corporation Loss Continuity

Definition

Schedule 4 (T2SCH4) is the running ledger of a corporation's unused tax losses. It reconciles opening balances, current-year additions, carrybacks to prior years, and carryforwards applied against current-year income for each category of loss under s.111. Because loss balances are among the most valuable tax attributes a corporation owns, the CRA requires an explicit year-over-year schedule.

File Schedule 4 in any year the corporation has a loss balance, generates a new loss, or applies a loss against income. Reconcile the balance with filed returns and CRA assessments rather than assuming the bookkeeping loss equals the available tax loss.

Key rules

The 20-year periods above apply to losses from tax years ending after 2005. Restricted farm-loss status depends on the section 31 chief-source-of-income test, not simply on hours labelled full-time or part-time.

Key mechanics:

• Net capital losses can only offset taxable capital gains, not ordinary income.
• Non-capital losses can offset any source of income.
• Losses incurred in a year before an acquisition of control are restricted under s.111(5): net capital losses generally cannot cross the acquisition. Business non-capital losses may cross only under the continuity, profit-expectation and income-stream restrictions in section 111(5); property losses do not receive that business-loss exception.
• Use Schedule 4 to request a federal corporate loss carryback, with the return for the loss year or separately as directed by CRA. The three-year carryback period identifies the prior tax years that may receive the loss; it is not a general three-year filing deadline for a form called T2A.
• Part-year rules: a deemed year-end triggers a short taxation year, which still counts as one full year for the carryforward clock.

Example

Acme Ltd. had the following history:

Common mistakes

• Missing the 20-year expiry on non-capital losses from 2006 or later (the applicable period for older losses depends on the year they arose).
• Applying losses from before an acquisition of control without the s.111(5) stream restriction.
• Failing to reduce the balance by the amount used on T2 line 331 (non-capital) or line 332 (net capital).
• Treating an unused limited partnership loss as freely deductible without checking the at-risk calculation for that partnership.
• Requesting a carryback without reducing the remaining loss balance in the loss-year Schedule 4.

Official source

CRA corporate loss continuity and carryback instructions.

Related concepts

• T2 Corporate Return Overview
• Schedule 1. Net Income for Tax
• Schedule 6. Capital Gains and Losses