The general rule for capital losses is that one half of the loss is deductible, but only against taxable capital gains. Business investment losses are a special type of capital loss that receive preferential tax treatment. One half of a business investment loss, the allowable business investment loss (ABIL), is deductible against all sources of income.
A business investment loss may arise from the disposition of:
a) a share of the capital stock of a small business corporation (SBC); or
b) debt owing from a Canadian-controlled private corporation (CCPC) that is:
bankrupt and that was an SBC when it became bankrupt; or
a corporation that was insolvent and an SBC at the time of its winding-up order.
The disposition must be to an arm’s length person. An arm’s length person can include an unrelated individual or an unrelated corporation. Determining whether a person is related for tax purposes can be complex, particularly with corporations. We would be happy to assist you with this analysis.
A CCPC is a corporation that is controlled by Canadian resident individuals that is not publicly traded. An SBC is a CCPC, and all or substantially all of its assets are used principally in an active business carried on primarily in Canada, or debt or shares in connected SBCs. All or substantially all is interpreted to be 90% or more based on the fair market value of the assets. These criteria must be met at any time during the 12 months prior to the disposition.
A loss on a deemed disposition may also qualify. A deemed disposition will occur if the taxpayer files an election in respect of:
A debt owing to you at the end of a taxation year that is established to be a “bad debt” (it is uncollectable) in the year, or
A share in a corporation owned at the end of the year, where
the corporation has become bankrupt during the year,
the corporation is insolvent and a “winding up” order has been made in the year, or
the corporation is insolvent, neither the corporation nor a corporation controlled by it carries on business, the fair market value of the share is nil, and it is reasonable to expect that the corporation will be dissolved or wound up and will not commence to carry on business.
As a result of the election, the taxpayer will be deemed to have disposed of the debt or shares for $nil proceeds and to have immediately reacquired the debt or shares at a cost of $nil.
An unused ABIL can be carried back three years or forward ten years. After the tenth year, the ABIL will no longer be deductible against all sources of income. It will be transferred to the pool of net capital losses and can be carried forward indefinitely to deduct against taxable capital gains. The amount of the ABIL will be reduced by the amount of any capital gains exemptions (CGE) previously claimed. Similarly, the amount of a ABIL claimed will reduce a future CGE. The CGE allows you to receive tax-free capital gains on the disposition of certain properties, such as qualified SBC shares. The amount of the CGE deducted from the ABIL will be treated as a regular capital loss.
ABILs provide much greater flexibility than regular capital losses and can significantly reduce your tax bill.
For more information, please contact firstname.lastname@example.org or 1 844-GYTD-CPA