What is an Allowable Business Investment Loss?
When a capital loss satisfies certain criteria, it can be reported to the CRA as an Allowable Business Investment Loss (“ABIL”), which is subject to preferential tax treatment.
For a loss to be an “allowable business investment loss”, it first must be a “business investment loss”. An ABIL is simply the portion of a business investment loss that is deductible (thus the word “allowable” in ABIL). Of your total business investment losses of tax year, 50% qualify as ABILs and are therefore deductible. However, unlike other sources of income like capital gains which can only be applied to reduce capital losses, the Canadian tax authorities have decided to give taxpayers greater privileges when applying ABILs.
For instance, taxpayers can apply ABILs to any source of income, to reduce their overall taxable income. If your ABIL is higher than your income, you could effectively reduce your income to zero and pay no income tax for that year. Additionally, if you have ABILs that you do not wish to apply to your income earned this year, it can optionally be carried back three years or forward ten years to offset any amount of income from any source in those years.
What are the Requirements to claim an ABIL?
There are four questions taxpayers must ask themselves before determining whether their capital loss qualifies as an ABIL:
- Did the Taxpayer invest in shares or debt of a Corporation?
The taxpayer would have had to purchase shares or have made a loan to a corporation.
- Has the debt been established to be a bad debt?
A “bad debt” is an expense owed to a creditor that is unlikely to be paid. For a debt to be claimable as an ABIL, it must be a bad debt; uncollectible.
- Was the property issued by a “Small Business Corporation”?
An ABIL can only be claimed on a loss from a stock in a small business corporation (“SBC”) or a debt owing to the taxpayer by an SBC. Meeting the definition of an SBC in Section 248 of the ITA is an important element of an ABIL claim:
- It must be a Canadian-controlled private corporation (“CCPC”)
- All or substantially all of the fair market value of the assets is carried on primarily in Canada
- Was the property acquired for the purpose of earning income?
The investment must have been made to an active business. Taxpayers are sometimes faced with the argument that the business was not being carried on because it never commenced or because it had already ceased. The question comes down to whether the taxpayer can prove they were investing in a business that was active; that it had indicia of an active business. Indicia can include an organizational structure, employees, market research, cost benefit analysis, etc.
Are there any Limitations to Claiming an ABIL?
The amount of ABIL you can claim is reduced by the amount you have previously claimed under the lifetime capital gains deduction. The capital gains exemption has a top limit, exempting you from paying tax on the first $424,126.00 (as of 2018) of taxable capital gains (half of $848,252.00 in capital gains) in your lifetime. If your capital gains exempt income from the past in addition to your ABIL reach that threshold, then the remainder can only be used to reduce capital gains.
If you have questions about the above, 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!
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.