How to use carryforwards and carrybacks to reduce taxes

Not every deduction or tax credit needs to be used in the same year it arises. In fact, Canada’s tax system allows you to carry certain losses and unused deductions backward to prior years or forward to future years. This flexibility helps smooth your taxable income, reduce taxes over time, and take full advantage of income fluctuations.

Knowing which carryforward or carryback options are available—and when to apply them—can help you avoid wasting deductions and reduce your tax burden during high-income years.

What Is a Carryforward or Carryback?

A carryforward allows you to use unused deductions or credits in future tax years. A carryback lets you apply a deduction or loss to a previous year’s return, potentially resulting in a refund for taxes you already paid.

These tools are especially useful when:

• You experience a large capital loss during a volatile market year

• You have a net business loss but expect future profits

• You cannot use a tuition credit or donation fully in the current year

• You are carrying forward the capital gains deduction limit or foreign tax credits

Each carryforward or carryback has its own rules around eligibility, length of time, and how to apply it.

Common Carryforward and Carryback Rules

How to Apply a Carryforward

Most carryforward items are tracked automatically by CRA or by your own return records. Here’s how to use them:

• Review your Notice of Assessment for unused balances like RRSP contributions or capital losses

• When filing your return in a future year, include the carryforward in the relevant section (e.g., Schedule 3 for capital losses, Schedule 11 for tuition)

• For donation or tuition carryforwards, apply only the amount needed to reduce your tax for that year

• For large carryforwards like business or capital losses, consider how applying them will affect other income-tested benefits like OAS or the age amount

How to Apply a Carryback

Carrybacks are used to claim a refund for taxes already paid in a previous year. You must:

1. Identify the eligible loss or deduction from the current year

2. Complete the appropriate form:

   • T1A (Request for Loss Carryback) for business or capital losses

   • Use Schedule 3 to report prior year capital gains when applying a capital loss

3. Include the carryback form with your current year’s return

4. CRA will reassess your previous year’s return and issue a refund if applicable

Carrybacks are particularly useful if you had high capital gains or business profits in one of the previous three years but now have significant losses.