A business investment loss results from the actual or deemed disposition of certain capital properties. It can happen when you dispose of one of the following to a person you deal with at arm's length:
- a share of a small business corporation
- a debt owed to you by a small business corporation
- Your loss was an investment or loan (shares or debt) to a private Canadian Corporation i.e. not listed on any publicly traded market;
- The private Canadian Corporation must be majority owned by Canadian residents;
- The business conducted by the small business corporation must be from a location in Canada and must be ‘active income’ (real estate rentals or portfolio investment firm is not active income). Holding companies may be eligible in certain circumstances; and
- Unless you are a shareholder in the company that you loaned funds to, interest has to be charged (not necessarily paid) on the loan.
If you lose money on an investment in a small corporation, you can use an allowable business investment loss to offset your income and reduce your tax bill. This is just one of the ways you can optimize capital losses you experience as a business owner or investor. Make sure you keep accurate records of your investments by tracking expenses and income.
You can deduct your ABIL from your other sources of income for the year. If your ABIL is more than your other sources of income for the year, include the difference as part of your non-capital loss for 2019.
You can carry a non-capital loss arising in 2003 or prior years, back 3 years and forward 7 years. You can carry a non-capital loss arising in a tax year ending after March 22, 2004 through December 31, 2005, back 3 years and forward 10 years.
Although you can generally carry a non-capital loss arising in tax years ending after 2005, back 3 years and forward 20 years, this extension does not apply to a non-capital loss resulting from an ABIL.
A non-capital loss resulting from an ABIL that has not been used within 10 tax years will become a net capital loss in the eleventh year.
To carry a non-capital loss back to 2016, 2017, or 2018, complete Form T1A, Request for Loss Carry-back, and include it with your 2019 Income Tax and Benefit Return (or send it to the CRA separately). Do not file an amended return for the year to which you want to apply the loss.
Complete Chart 6 in Chapter 5 of Guide T4037 to compute the amount of an ABIL. The chart (and a link) is provided in the main body of the article.
It is best to use a tax lawyer in these cases. Tax lawyers are trained to review the precise language of a tax act, policy, or publication to provide their opinion. We are also well adept in dealing with the Canada revenue Agency in such matters. Contact us today to see if your qualifies as an Allowable Business Investment Loss.
