IR7 Example 1 Loss limitation rule no longer applies — owner with previously non-allowable deductions
The following details are for Catherine who owns all of the shares in Company A, an LTC:
IRD number | 12–121–212 |
Total gross income | $10,000 |
Expenses/deductions | $15,000 |
Loss | $5,000 |
Non-allowable deductions brought forward | $10,000 |
Boxes 24O to 24R
This information only applies for an LTC that is in a partnership or joint venture with another LTC.
The loss limitation rule ensures that the deductions claimed reflect the level of an owner’s economic loss in the LTC. The “owner’s basis” refers to the adjusted tax book value of an owner’s investment in the LTC. The deductions an owner may claim are restricted if the overall deductions exceed the owner’s basis in the LTC.
See examples of the loss limitation rule at Example 1 Loss limitation rule no longer applies — owner with previously non-allowable deductions and Example 3 LTC loss limitation rule — with non-allowable deductions brought forward.
For each owner calculate their owner’s basis and any non-allowable deductions using the tables and information at Non-allowable deductions (IR7L only) — where loss limitation rule doesn’t apply for the owner(s). Please see Part 7 of the Look-through companies (IR879) guide before calculating the owner’s basis. It explains the terms used in the following calculation.
If there’s more than one owner, complete the tables at Non-allowable deductions (IR7L only) — where loss limitation rule doesn’t apply for the owner(s) for each owner separately.
* If Box 9 is a negative amount it means the owner has negative equity in the LTC and their owner’s basis will be treated as nil. Print “0.00” in Box 9.
Please note—deductions in Box 6 above also includes all the deductions claimed against gross income from the LTC from all sources in previous years in which the company was a LTC. For example, if the LTC has a rental property, all the deductions claimable against the rental income will be included in the total deductions figure, as well as expenses incurred in producing income from all other sources.
When each owner’s basis (Box 9 at Calculate the owner’s basis here) has been calculated you can work out if there is any limitation on the deductions claimable for each owner. If the:
owner’s basis (Box 9) is more than their attribution of the deductions (expenses), you won’t need to complete Box 24O—go to Non-allowable deductions.
attribution of deductions (expenses) to the owners are more than their owner’s basis you’ll need to complete Boxes 1 to 3 below to calculate the amount to declare at Box 24O.
The result is non-allowable deductions this year. Copy the amount from Box 3 into Box 24O on your IR7L.
Any deductions an owner can’t claim because of the loss limitation rule are carried forward and may be claimed in future years, subject to the application of the loss limitation rule in those years. Owners may only use these deductions against income from the LTC.
Non-allowable deductions
Complete the calculation (Boxes 1 to 5) below if you have:
non-allowable deductions brought forward from last year (copy the amount from Box 24R Non-allowable deductions on your IR7L 2018 form into Box 24P on your IR7L 2019 form) and/or
non-allowable deductions this year (that means Box 24O has an amount in it).
Prior years’ non-allowable deductions claimable this year
If there is a figure in Box 4, you will be able to claim prior years’ non-allowable deductions. Enter the smaller number of Box 3 and Box 4 as prior years’ non-allowable deductions claimed this year in Box 24Q on your IR7L.
Non-allowable deductions carried forward
The amount in Box 5 is the non-allowable deductions to carry forward. Copy this amount into Box 24R.