TaxCycle | Products | Pricing | Training | Documentation | Support | News

Non-capital loss - rep a client


#1

Hi there,

I’m just starting out my T2 business, and have a look at my client rep a client. My client had negative retained earnings (deficit) on the balance sheet, that should mean that he had non-capital loss, right? However, why does rep a client doesn’t show the corporation had non-capital loss? Unlike for personal where we can view which year the losses were from, CRA don’t keep track for corporation? So if I file a return claiming the loss, will CRA accept it? Is there a way I can find out how much loss was from which year?

Thanks


#2

Ask the client for the prior years T2 returns.

There are many ways to get a negative retained earnings without triggering an actual loss for tax purposes


#3

I did look at that… the previous accountant just randomly put a number so it make the taxable income to 0.


#4

How do you know that? Have you compared the schedule 1 to the financial statements? Did he perhaps take management salaries to come down to zero?


#5

Was it the accountant or the client providing the information. Based on the limited information, the warning signs are concerning.


#6

" My client had negative retained earnings (deficit) on the balance sheet, that should mean that he had non-capital loss, right?"

  • Not necessarily - Could have been Capital Losses or something else

“However, why does rep a client doesn’t show the corporation had non-capital loss?”

  • CRA has not implemented that online - and, there might not be any non-capital losses for the corporation…

“So if I file a return claiming the loss, will CRA accept it?”

  • What loss are you referring to? You don’t have any non-capital losses according to your post.

“Is there a way I can find out how much loss was from which year?”

  • By obtaining copies of the last 10+ years of the Corporations Financials, Tax returns, and assessments, or alternatively some reliable working paper schedules from the accountant who prepared the previous year

“the previous accountant just randomly put a number so it make the taxable income to 0”

  • That potentially could be quite a serious matter, and should be investigated further to ensure that the Opening Balances are not false and misleading - also, if you have evidence it was “random” (and classified as what?), the prior year may need to be re-stated/re-assessed after correction…

#7

The client brought in the last 2 years, and yes I compare the schedule 1 and financial statements. They are identical.


#8

I had ask the client to provide me with all the tax returns since the corporation started. Luckily he said he had them, which he should. So I will be working on finding out which year the non-capital loss came from.

Thanks all for all the post.


#9

That would likely be the best idea. Retained Earnings can become negative for something as simple as issuing dividends in excess of earnings. This would not cause any schedule 4 entries.


#10

Yes it is. But base on what the clients told me, it is just a small business, so he actually never issue himself any dividend up to date. All it is right now is the corporation is paying back the shareholder loan back to him slowly tax free. But when I told him, and he agree with me it is risky. So he will bring all the previous years in to me.


#11

Not sure what you are referring to is risky?

So far you have no evidence at all that this corporation has any non-capital loss for tax purposes at any time, or available or not… So far what you have is a suspicion (raised by your eagle-eye spotting a negative RE b/forward) that there may be a possibility that in some prior year there may or may not be a non-capital loss which may or may not be available to claim…
-Perhaps also a telephone call to CRA may help in adding more info :slight_smile:

  • Non-related comment/tip: Its better to not rely exclusively on what you are “told” verbally, except as a rough guide… the documentation (or lack thereof) will be what ACTUALLY happened… :wink:

#12

@joe.justjoe1

Well come to the forum Joe. I would recognize your postings anywhere. You and @snoplowguy need to change your avatars. Just do not seem right being the default.