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
|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.
If you would like more information or have any questions, feel free to contact us at 780.466.6204, or click here to send us an email.
Thanks to Stephanie Kwan of KWB Chartered Professional Accountants for providing this content.