If you are a sole proprietor or partner and file your income taxes on a T1 you need to fill out a Statement of Business or Professional activities on a T2125. Should your business expenses exceed your business income then you will record a business loss on this form.
"Using" this business loss depends on whether or not you have other income. If you do you can use the income from your business to offset your other income. This is an advantage for people who work full time and have a side business as you can write off business losses against your regular income. If you don’t have other income your business loss will not be a tax advantage for you.
Using Your Business Loss in a Different Tax Year If you have personal income you can offset your business loss up to three years back or seven years forward from the year of your business loss, therefore it can make sense to use your business loss to offset a larger tax bill in the future or the past.
Beware! you Cannot Write off Business Losses Forever According to the CRA your business should have a “reasonable expectation of making a profit” and will eventually generate more income, reduce losses and become more profitable. If you continue to write off business expenses for a number of years, then the CRA will decide that you decide that your business does not meet this expectation and will deny your claim for business losses in the current year and will assess your losses in previous years. See Canada Revenue Agency Profit Test.
Your Business Must be Legitimate Your business must be seen to be “clearly commercial in nature”. If you have a full-time job and start a side business, you must have customers and revenue. Otherwise your business expense claims may be denied by the CRA if they decide that your business is not a sufficiently commercial operation.
Incorporation If your business is incorporated you cannot use business losses from the corporation to offset your other income, except in some cases where investment losses result may from share dispositions or debt.
Claim Reasonable Expenses To avoid raising red flags which may result in a CRA audit you should always be reasonable with your expense claims.
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