What is an Allowable Business Investment Loss? ( ABIL)

An ABIL ( allowable business investment loss ) is a special type of capital loss that is subject to preferential tax treatment.

The main difference between an ABIL and a Capital loss, is that a regular capital loss can only be deducted against taxable capital gains, whereas an ABIL can be deducted from any source of income.

ABILs can be carried back 3 years and also forwarded to up to 10 years in the case that any ABIL incurred have not been used in a given year. After 10 years, if there remains any unused ABIL, this can be treated as net capital losses and can carried forward to be deductible against future taxable capital gains for an indefinite period of time.

The Question of Business Investment Loss

An ABIL represents 50% or “ one half of a business investment loss” . Below are the following scenarios where this can occur.
Actual Disposition:

• • – An ABIL is incurred whenever there is a capital loss from an actual disposition to a third party that is unrelated or has no common interest with you ( ex: Arm’s Length Person ) of
  • – A share of a small business corporation capital stock; or
  • – Debt in a Canadian-controlled private corporate (CCPC) that is:
  • – A small business corporation,
  • – Bankrupt and that was a small business corporation at the time it became bankrupt, or
  • – A corporation that was insolvent and a small business corporation at the time a winding-up order was made in respect of the corporation.

  A CCPC is a corporation that is controlled solely by Canadian residents and cannot be under the control of a public corporation, nor that of a non-Canadian resident. More information about a CCPC can be found under s.125(7) of the Canadian Income Tax Act.

  Another CCPC condition is that at least 90% of the fair market value of the asset of the Canadian-controlled private corporate ( CCPC ) must be attributable to the following criteria below in order to qualify as a small business corporation.

  These would include:

  • – Assets principally used in an active business carried on primarily in Canada by the CCPC or a related corporation, or
  • – Shares or debt obligations of other small business corporations in respect of which the holding corporation owns more than 10% of the shares.

  As long as any of the criteria mentioned above is met within a 12 month period of time preceding the disposition of the shares or debt, then a corporation can qualify as a small business corporation or CCPC.

  As a taxpayer, if you are required to repay a corporation debt from a previously assumed guarantee (you being the guarantor of the debt), this can also be deemed as an ABIL.

  Under subsection 39(12) of the Income Tax Act, a payment made by a taxpayer under a guarantee of the debts of a corporation is deemed to be a debt owing to the taxpayer by a small business corporation if:

  • – The tax payer made a payment to a person who was considered at arm’s length.
  • – The corporation was a small business corporation both at the time the corporation incurred the debt in respect of which the guarantee payment was made and at any time in the 12 months before the time any amount first became payable under the guarantee.

  Deemed disposition

  Under s.50(1) of the Canadian Income Tax Act, a deemed disposition can occur if at the end of a taxation year, a taxpayer has disposed of a debt or share for zero proceeds and has re-acquired that property immediately at zero cost. Therefore in general, a deemed disposition can occur if a taxpayer makes an election for a year in regards to:

  • – If it is established that a bad debt ( uncollectable debt ) is owed to you by the corporation at the end of the taxation year, or
  • – If a corporation has gone bankrupt during the year while you are owning a share in that corporation.
  • – If a corporation has become insolvent and a court order to force the corporation into liquidation has been placed ( winding up order ) during that year.
  • – The corporation no longer carries on business, has gone insolvent, or the shares have devaluated to nil and it is expected that the business will become dissolved or wound up to never carry on business again.

  Important tax Tips: Ensure that you keep all important documents

  ABILs are regularly audited by the Canada Revenue Agency ( CRA ) and when a business investment loss is incurred from a bad loan (shareholder loan paid to the company), it is important to determine an intention to earn a profit from the loan in question.

  As shareholders may claim that their expected revenue is derived from dividends, it is always advisable to document a loan in proper detail in writing and to charge an interest amount on that loan.

  Regardless, it is always important to keep all supporting documents on record for legal reasons.

  When the structuring of a business evolves into a corporation, or if you had incurred business investment losses and the CRA refuses your claim for an ABIL, it is best to contact one of our tax professionals to help and guide you through the process.

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  Disclaimer:

  This article only provides information in a general nature and is only as current as the date in which it is posted. It is not updated and therefore may no longer be current. This document should not be relied upon as it does not claim to, nor provide advice on legal or tax matters. All tax situations are specific in nature and will likely differ from the situations that are presented in the article. It is advisable that you seek and consult a tax professional if you have any specific legal or tax questions. This document is intended to provide general information on a particular subject or subjects(s) and this article is not an exhaustive treatment of such subject(s). In accordance, the information in this document is not intended to constitute or replace accounting, tax, legal, investment, consulting, or other professional advice or services. Before any decision is made, or any action taken which might affect your personal finances or business, you should consult a qualified, professional adviser.