Allowable Business Investment Loss
A business investment loss is a capital loss from the sale of shares of a small business corporation, or it can be a debt owed to someone by a small business corporation. Capital losses may be deducted against Capital gains except in some circumstances.
Subsection 38(c) of the Income Tax Act states that an allowable business investment loss (ABIL) is 50% of the business investment loss. What makes an ABIL so attractive is that it can be used to reduce taxable income, rather than only capital gains.
Taxpayers must keep in mind that ABILs may not always be available. One specific instance is where a taxpayer has claimed the lifetime capital gains exemption.
Under subsection 50(1) of the Income Tax Act a taxpayer may make an election to “sell” worthless shares or debt for nothing. The taxpayer then immediately re-purchases the shares or debt. This can be done if the shares are of a small business corporation and they have zero fair market value, or if the debt owing has been established to be a bad debt.
The clear advantage of this election is that taxpayers are able to deduct investments or debt while still maintaining ownership. Please keep in mind that if the shares become valuable, and are sold, or if the debt no longer is a bad debt, then the taxpayer would have to include certain amounts previously deducted as income in that year.
If you have attempted to claim a business investment loss, or an allowable business investment loss and the Canada Revenue Agency is auditing your loss claim, give us a call today to see how we can help!
Abrametz v. Canada, 2009 FCA 111 – Business Investment Loss vs. Capital Loss
Turner v. Canada, 2000 CanLii 15717 – When is a Debt a Bad Debt?
Gamus v. The Queen, 2001 CanLii 684 – Four Essential Factors for an ABIL Claim
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.