When you make a good investment, the CRA is very happy to tax you; however when your investment no longer has any value, getting a deduction can be difficult. Generally a loss on the disposition of an investment, like shares or debt, is treated as a capital loss, deductible against other capital gains. As long as you have other capital gains, you will at least save a few dollars in tax.
The problem occurs when you do not have capital gains to shelter and you want to claim your loss against other income. In limited situations, the CRA will allow you to claim a Business Investment Loss.
A business investment loss is basically a capital loss from a disposition of shares or debt of a small business corporation to which subsection 50(1) applies, or to an arm’s length person. One half of this loss is an allowable business investment loss (ABIL). Unlike ordinary allowable capital losses, an allowable business investment loss may be deducted from all sources of income for the taxation year in which it is recorded. Generally, an allowable business investment loss that cannot be deducted in the year it arises is treated as a non-capital loss which may be carried back three years and forward ten years, to be deducted in calculating taxable income of these other years. Any such loss that is not deducted by the end of the ten-year carry-forward period is then treated as a net capital loss which can be carried forward indefinitely to be deducted against taxable capital gains.
A detailed description of the rules related to claiming an ABIL can be found in CRA’s IT484R2r. The information is a little out of date; however the general concepts have not changed.
The rules outlined are very specific and you must fit precisely within them, otherwise you not obtain the benefit of claiming an ABIL. The other issue is that almost all ABIL claims are audited by the CRA.
There are many ways to go offside and many ways to fix the problem with advance planning. For example, the corporation needs to be a Canadian Control Private Corporation (CCPC) using substantially all of its assets to carry on business in Canada within 12 months of the disposition.
If your investment does not qualify and if you have not yet disposed of the investment, you may be able to fix the problem. You may be able to make changes in order to have the corporation qualify as a CCPC; you may be able to have a non-resident operation either relocated to Canada or deemed to be resident in Canada.
The most important step is planning in advance for the disposition of the investment. If you have an investment that has lost value and you would like to ensure that all possible steps have been taken to enable you to claim the loss in the most tax efficient manner, we can help.
15 ways to lose your ABIL deduction
- Investment was made to a corporation that is not a Qualified Small Business Corporation (QSBC).
- You waited too long to claim your write-off.
- The corporation did not have its assets used in Canada.
- The corporation did not carry on an active business within 12 months of your disposition.
- The investment was not made to earn income; your investment was an interest free loan to a spouse, child or their corporation.
- The investment was made to an individual, partnership or trust, rather than a corporation.
- Your section 50(1) election was not filed correctly.
- The disposition was not made to an arm’s length person.
- You honoured a loan guarantee to assist the owners of the corporation.
- You are found to be liable for unremitted employee withholdings.
- You have not disposed of all of your shares (including those owned by other family members).
- You have claimed a capital gains exemption in prior years.
- You have poor documentation or insufficient support, such as a missing loan agreement or share certificates.
- You are unable to provide cancelled cheques to support the original investment.
- You are unable to provide financial statements of the corporation.