Allowable Business Investment Loss Claims
An allowable business investment loss (“ABIL”) is a special type of capital loss that is deductible against all sources of income. This is different from capital losses that can only be deducted against capital gains. An ABIL can be carried back 3 years and carried forward 10 years. After 10 years, the unused ABIL will be treated as net capital loss and carried forward to be deductible against taxable gains indefinitely.
Business Investment Loss
An ABIL is 50% of a business investment loss. A business investment loss can be incurred in the following scenarios:
- Actual Disposition
When there is a capital loss from an actual disposition of a share of capital stock of a small business corporation or debt in a Canadian-controlled private corporation (“CCPC”) to an arm’s length individual, a business investment loss occurs. An arms-length person is a party not related to you or does not share a common interest with you.
Debt in a CCPC also includes:
- A small business corporation,
- A small business corporation at the time it became bankrupt, or
- An insolvent corporation and a small business corporation at the time winding-up order was made in respect of the corporation.
Under s.125(7) of the Income Tax Act, a CCPC is defined generally as a Canadian private corporation, not controlled by a non-resident or public corporations.
To qualify as a small business corporation, at least 90% of the fair market value of the assets of the CCPC must be attributable to (1) assets primarily used in an active business carried on largely in Canada by the CCPC or a related corporation, or (2) shares or debt obligations of other small business corporations in respect of which the holding corporation owns more than 10% of the shares.
If the corporation meets these criteria at any time in the 12 months preceding the disposition of the shares or debt, it can qualify as a small business corporation.
Another way a business investment loss can occur is if the taxpayer has to repay a corporation debt from a previously made guarantee.
- Deemed Disposition
Under s.50(1) of the Income Tax Act, a deemed disposition can occur when a taxpayer is deemed to have disposed of the share or debt at the end of the taxation year for no proceeds as well as immediately reacquired the property for zero or nil. In other words, a deemed disposition can occur if a debt owing to you at the end of a taxation year is considered “bad debt” (meaning uncollectible) or a share in a corporation owned at the end of the year, where the corporation has become bankrupt, or insolvent, and a winding-up order has been made in the year.
How to Claim ABIL?
To claim ABIL on your 2021 income tax return, you enter the business investment loss amount on line 21699 of your income tax benefit return. If you claimed a capital gains deduction in a previous year, you have to reduce your business investment loss. To determine the reduction, the Canada Revenue Agency (“CRA”) provided a formula to complete the calculation.
Also, you should include a note on your income tax and benefit return that states the following:
- name of the small business corporation;
- number and class of shares, or the type of debt you disposed of;
- insolvency, bankruptcy, or wind-up date;
- the date you bought the shares or the date you acquired the debt;
- amount of the proceeds of disposition;
- adjusted cost base of the shares or debt;
- outlays and expenses on the disposition; and
- amount of the loss.
The CRA tends to audit ABILs regularly, so it is important to keep supporting documents.
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.