What criteria must be met for a business investment loss to be considered an allowable business investment loss (ABIL)?

To qualify as an allowable business investment loss (ABIL), the loss must result from the disposition of shares or uncollectible debts in a qualifying small business corporation. Essentially, an ABIL represents 50% of your business investment loss, making it eligible for deduction against various income types.

What distinguishes an allowable business investment loss (ABIL) from a standard capital loss?

An allowable business investment loss (ABIL) specifically pertains to investments in a small business corporation and offers more favorable tax treatment. Unlike a standard capital loss, which can only offset capital gains, an ABIL can be used to deduct against other types of income.

When can an allowable business investment loss (ABIL) be claimed in situations involving small business corporation insolvency?

An allowable business investment loss (ABIL) can be claimed when shares or debts in a qualifying small business corporation become worthless due to insolvency. This deduction applies when there is no reasonable expectation of recovering the investment.

What specific documentation is required to successfully claim an allowable business investment loss with KWB Accountants & Advisors?

To successfully claim an allowable business investment loss, you need to provide documentation such as the adjusted cost base of shares, details of their disposition, or proof that a debt has become uncollectible. Maintaining thorough records is essential to substantiate your claim.

Allowable Business Investment Loss (ABIL)

Understand allowable business investment loss (ABIL) and how it can arise from share dispositions or uncollectible loans in a small business corporation.

An allowable business investment loss can arise in many ways:

1) Through a disposition of shares in a small business corporation

2) Through a disposition of debt owed to you by a small business corporation

3) When amounts that you have loaned to a small business corporation become uncollectible, or the corporation has gone bankrupt, insolvent or was wound up during the year

All transactions must be with corporations that are at arm’s length

All transactions must be with corporations that are at arm’s length, meaning that you and the company cannot be related to one another. The corporation must also use at least 90% of their assets in a business carried on in Canada. Therefore, a business investment loss cannot be claimed on shares in public companies or companies controlled by non-residents.

The term ‘allowable business investment loss’ or allowable business investment loss, refers to the 50% portion deductible for tax purposes.

How are allowable business investment losses and capital losses different?

Allowable Business Investment Loss	Capital Loss
Can be deducted against all types of income	Can only be deducted against capital gains
Can be carried back 3 years or forward 10 years (but must be used fully in the current year to bring taxable income to zero, before carrying the balance backwards or forwards)	Can be carried back 3 years or forward indefinitely
If unused after 10 years, the loss is converted to a net capital loss and can be carried forward indefinitely to be used against capital gains.	Can only be used against other income upon death when your final tax return is filed.

An allowable business investment loss is deductible against all types of income

The biggest advantage of claiming an allowable business investment loss is that it is deductible against all types of income, not just capital gains. If you earn employment, rental, or even investment income, your overall tax bill will be reduced in the year that the allowable business investment loss is claimed. A planning opportunity exists to ensure your allowable business investment loss occurs in the best year possible.

You should be aware that the CRA regularly audits allowable business investment loss claims, so you should ensure that you meet the requirements before claiming this type of loss.

Ensure that you meet the requirements before claiming this type of loss.

One requirement is that the money must have been loaned for the purposes of earning income. One way to ensure this has been met is to charge a market rate of interest on the loan. It is a good idea to have this documented in writing through a loan agreement or a contract.

If you are claiming the loss because a corporation has gone bankrupt or insolvent, then this is considered a deemed disposition and an election must be made in order to claim this type of loss. You should also make sure your tax return is filed by the deadline. CRA will not allow the special election if your tax return is filed late.

An allowable business investment loss is claimed on line 217 of your T1 Personal Income Tax Return.

For more information on an allowable business investment loss, click here.