Allowable Business Investment Loss (“ABIL”) – Do you have one?

With the current tough economic times there have been a number of hits to the portfolio of every investor. And while no one enjoys these situations, the possibility of tax relief as a result of the loss, may take away part of the sting.

Do you own shares in a private corporation that has gone bankrupt? Or a loan to a private corporation that will not be recovered? Then this option may be for you.

What is an ABIL?

A Business Investment Loss (“BIL”) is a capital loss that results from an arm’s length disposition of:

  • shares of a small business corporation (“SBC”) or
  • a debt owed to you by an SBC.

An Allowable Business Investment Loss (“ABIL”) is 50% of the BIL. This is the portion that is eligible to provide tax relief.

An SBC is a Canadian Controlled Private Corporation (“CCPC”) in which substantially all of the assets are used primarily in active business carried on in Canada.

Keep in mind that when a capital gains deduction has been claimed in prior years, a loss may not qualify as an ABIL in certain situations.

Please note that ABILs are a complex election and many additional criteria must be assessed prior to determining eligibility. These specific considerations are beyond the scope of this article and will need to be evaluated on a case by case basis.

Benefit of an ABIL

Investment losses are typically capital losses, with 50% of the loss being eligible for use. Taxable capital losses can normally only be applied against capital gains (not always helpful). However, when certain criteria are met, you may have an ABIL. An ABIL can be deducted against ALL sources/types of income. Now we’re talking.

If you have insufficient income to use the ABIL in the year of the claim it can be carried back three years or forward ten years as a non-capital loss. If the ABIL is unused after ten years, it will become a regular capital loss, which can be carried forward indefinitely and used against future capital gains.

ABIL on Debt Disposition

In order for debt to be eligible as an ABIL, the debtor must be an SBC.

If the debtor is at arm’s length from the investor, the debtor must be bankrupt or deemed to be uncollectible, and the debt must have been acquired for the purpose of earning income.

If the debtor is not an arm’s length corporation and the debt is owed to an individual, the debt must meet the criteria of a bad debt and a Section 50(1) election must be filed.

If the debt is owed between related corporations (non-arm’s length), the ABIL will be denied and the deduction will be limited to a capital loss.

ABIL on Share Disposition

Similar to debt, shares acquired in an arm’s length corporation need to have been acquired for the purpose of earning income.

When the shares are owned in a non-arm’s length corporation there will be additional evaluations to determine if the ABIL can be claimed by determining if it has been wound up, is bankrupt or the demise can be reasonably foreseen.

Worthless Shares or Debt

Perhaps you have a situation where the shares or debt are worthless but have not actually been disposed of. In that circumstance, you could elect under Section 50(1) to have disposed of the shares or debt for nil proceeds. You would then be deemed to have reacquired the shares or debt immediately after for nil cost.

In order for this to occur:

  • the SBC must be insolvent and the shares must have nil fair market value, or
  • the debt has been determined to be a bad debt and all efforts of collection have been pursued.

Conclusion

An ABIL deduction is subject to the assessment of several variables, which may include additional election filing requirements. Due to the advantageous application against any type of income, these claims are closely scrutinized by Canada Revenue Agency. Every situation will be different and proactive tax planning can greatly assist in supporting your claim.

If you think you may have a loss on shares or debt, give us a call!