Understanding Allowable Business Investment Loss (ABIL)

Key Takeaways

Allowable Business Investment Loss (ABIL) is calculated as 50% of business investment losses for the tax year.

ABIL can be claimed on the disposal of shares of small business corporation or a debt owed by such a corporation, as long as the transaction was carried out at arm’s length.

ABIL can be deducted from other sources of income for the year. If ABIL exceeds other sources of income, the difference will become part non-capital loss.

If you have experienced a business investment loss in a given tax year, you may be eligible to deduct half of those losses from your income. This deduction is known as the Allowable Business Investment Loss (ABIL) and it is calculated as 50% of your business investment loss for the tax year. However, any ABIL amount exceeding your current-year income must be included as part of your non-capital losses. These non-capital losses can be carried forward for up to 10 years or carried back for up to 3 years.

A business investment loss occurs when you sell or you are deemed to have sold certain capital properties. This situation arises when you dispose of either a share in a small business corporation or a debt owed to you by such a corporation, provided the transaction occurs with someone you deal with at “arm’s length”. Arm’s length means each party is acting independently and without any special relationship or influence. Essentially, they are not closely related or connected in a way that might affect their business transactions. Small business corporation is defined as any corporation that was a small business corporation at any time during the 12 months before the disposition.

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You may also have allowable business investment loss if you are deemed to have disposed, for nil proceeds of disposition, a debt or a share of small business corporation under any of the following circumstances:

If a small business corporation owes you a debt (excluding debts from the sale of personal-use property) that is deemed to be a bad debt at the end of the year.

If, at the end of the year, you own a share (other than a share received as consideration from the sale of personal-use property) in a small business corporation that:

Has gone bankrupt during the year.

Is insolvent and has a winding-up order issued during the year under the Winding-up Act.

Is insolvent at year-end, neither the corporation nor a corporation it controls is conducting business, and the share’s fair market value is nil. Additionally, it is reasonable to expect that the corporation will be dissolved or wound up and will not resume business operations.

You can elect to be deemed to have disposed of the debt or share of the small business corporation at the end of the year for nil proceeds of disposition, and to have immediately reacquired the debt or share after the end of the year at a cost equal to nil (source: Canada.ca). By resetting the cost base to nil, you enhance your ability to claim this loss. The subsection 50(1) election can be made when filing your income tax and benefit return.

ABIL can be deducted from other sources of income for the year. If ABIL exceeds other sources of income, the difference will become part non-capital loss. Generally, non-capital losses can be carried back 3 years and forward 20 years, but this rule does not apply to non-capital losses from ABIL. An ABIL that has not been used withing 10 tax years will become a net capital loss in the eleventh year. You can use this loss to reduce your taxable capital gains in any year after.

To carry a non-capital loss back to any previous 3 tax years, the individual must complete Form T1A – Request for Loss Carryback which can either be included with the return or sent to the CRA by mail or submitted online through CRA My Account.

For further information please contact Taxtron Support at 416-491-0333 or visit www.taxtron.ca