Tax Implications of a Terminal Loss

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Terminal Loss Definition by Canada Revenue Agency (CRA)

Line 9948 – Terminal loss states that you have a terminal loss when you have no more property in class at the end of a year, but you still have an amount you have not deducted as capital cost allowance (CCA).

CCA is the deduction you can claim over several years for the cost of depreciable property, that is, property that wears out or becomes obsolete over time such as a building, furniture, or equipment that you use in your business or professional activities.

In general terms, a terminal loss on the sale of a property occurs when you sell it for the proceeds that are less than its undepreciated capital cost (UCC).

Calculation of a Terminal Loss

When an asset is disposed off during the year, its selling price is compared to its undepreciated value of the asset. If the selling price is lower than the undepreciated value, the difference is a terminal loss.

Example: 

You have a building, at a cost of $20,000, for your business, and its UCC at the beginning of the year is $12,000. You sell the building for $7,000. 

Terminal loss   = UCC at the beginning of the year – sale proceeds 

= $12,000 – $7000

= $5,000

Tax Implications of a Terminal Loss

If you incur a terminal loss on the sale of an asset Income Tax Act normally allows you to treat the entire amount as a tax deduction.

The UCC of a class is . The total capital cost of all the properties of the class minus the CCA you claimed in previous years.’ If you sell depreciable property in a year, you must also subtract from the UCC one of the following amounts, whichever is less:

  1. the proceeds of disposition of the property minus the related outlays and expenses.
  2. the capital cost of the property.

If you have disposed of all the assets in a specific CCA class but there is still a positive UCC balance at the end of the year, Income Tax Act allows you to claim a terminal loss on this remaining balance in the current year. The terminal loss is deducted from your business or property income and reduces the remaining UCC balance in the class to $Nil.

Example:

Capital cost of an asset $20,000
Sale proceeds $7,000
UCC of the CCA class at beginning of the year$12,000
Minus disposal (lower of $20,000 and $7,000)($7,000)
Balance of UCC after disposal$5,000
Terminal loss($5,000)
Final UCC$Nil

Note: Note that if any asset had been purchased and added to the class just before year-end there would be no terminal loss allowed because there would still be an asset left in class. In this case, it would be beneficial to postpone the purchase of the new asset until after year-end.

Is Terminal Loss a Capital Loss?

A loss from the sale of depreciable property is not considered to be a capital loss.  However, you may be able to claim a terminal loss. Depreciable assets are considered to be a part of business activities; therefore, they are better in-targeted with your business through tax depreciation (CCA) and terminal losses than a capital loss.  

Can Terminal Losses be carried back or forward?

If the terminal loss exceeds other income, it can be carried back or forward to other taxation years as a non-capital loss. A terminal loss is not deductible when it is on sale of

  • passenger vehicle in class 10.1
  • property in class 14.1 unless you have stopped carrying on the business to which it relates.

If you need any further assistance to unfold the complexities of terminal loss, feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step towards proper management of your finances.

Salman Rundhawa
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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