On April 15 the government announced new loss carry-back rules designed to ease the tax burdens on businesses who end up with losses as a result of the COVID-19 crisis. Normally losses must be carried forward (with some limitations) to future years to be offset against future taxable earnings. This is of little help to a business right now, and there is no guarantee of future earnings, especially if a business ends up closing down. In some cases tax payments from last year are still due, despite the business losing money in the next. Loss carry-backs are common in many other jurisdictions and allow you to effectively apply the loss to a prior year’s taxable income and get a refund of taxes paid for that year.
As part of this package, the government announce intentions to provide for the following:
- For the 2020 and 2021 tax years you will be able carry a loss back to the immediately prior year (assuming you had net taxable income)
- 2021 Provisional Tax can be estimated to manage your tax payments during the year and even to create a refund before the new tax return is filed
- For 2022 years and beyond a new loss-carry-back regime will be introduced
- Loss carry forward restrictions will be loosened to allow losses to be utilized by subsequent owners (currently a 50% change in ownership eliminates losses carried forward) who are carrying on the same or similar business as the one that created the loss. This will be most useful to high-growth companies that are continually raising equity funds
Please note that these benefits do not help you if you still have profits. It is also more complicated if you have distributed income to shareholders using Shareholder Salaries, a common technique for small businesses.
The legislation will not be introduced to Parliament until at least April 27, and no further details are available.