How to recoup your investment losses using the Allowable Business Investment Loss (ABIL) Deduction
You’ve heard of the expression, “It seemed like a good idea at the time.” Unfortunately, you’ve decided to invest your hard-earned money into a promising investment and the hope for a profitable return has gone south.
The investment may have been a share purchase or a loan that turned into a bad debt when the corporation in which you made the investment has become insolvent, bankrupt, or has proceeded with winding down processes. As a result, the value of your investment, loan, or share will be nil.
Where there is no hope of recovering your investment, you can still recoup a portion of your investment by deducting half of your Allowable Business Investment Loss (ABIL) if the investment was made in a small business corporation, otherwise known as a Canadian Controlled Private Corporation (CCPC). A CCPC is a private corporation that substantially uses all of its assets in operating an active business in Canada.
It is important to initiate the ABIL claim as soon as possible after the corporation ceases active business operations.
Other scenarios that would allow you to claim the ABIL include:
– Payment of GST/HST payroll withholdings made on behalf of a corporation that were not reimbursed.
– Guarantees for a loan that have not been repaid.
– Acquiring debt of a small business corporation that has not been repaid.
– Making a direct investment as a partner, joint venture, shareholder, in a private small business corporation that has failed.
– You own or co-own a corporation and invested your personal funds in the company that has become insolvent.
– You were a victim of fraud or a scam of a resident business in Canada.
How much can you save?
The amount of loss deducted from your income is your allowable business investment loss (ABIL).
When completing your tax return, you subtract your business investment losses from your capital gains deductions to arrive at the ABIL amount, 50 percent of which is deductible. Depending on your tax bracket, a taxpayer can recover anywhere between 15 percent and 25 percent of their bad investment.
The ABIL can be deducted from all sources of personal income and can be applied three years back or 10 years forward from the year when the deduction was generated. If not used within the 10 years, the ABIL becomes a capital loss. As such, it can be carried forward indefinitely and claimed against capital gains only.
Do you qualify for the ABIL?
The four qualifiers for an ABIL are as follows:
- 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 generate ‘active income’ (real estate rentals or income from a portfolio investment firm is not active income).
- Unless you are a shareholder in the company that you loaned funds to, interest has to be charged (not necessarily paid) on the loan. Documenting intentions to earn interest income is an important determinant in making a successful ABIL claim.
What to include in your claim:
In claiming the ABIL, the taxpayer should attach a note to your income tax and benefit return that states the:
- name of the small business corporation
- number and class of shares or the type of debt you disposed of
- insolvency, bankruptcy, or wind-up of the Canadian Controlled Private Corporation (CCPC)
- the date you bought the shares, or the date you acquired the debt
- amount of the proceeds of disposition
- adjusted cost base of the shares or debt
- outlays and expenses on the disposition
- amount of the loss
Convincing CRA that you did not recover the amount you are claiming is important part of the claim. Items that will be reviewed by CRA include corporate tax filings, documentation available to prove the original investment, tax treatment of other co-owners or lenders, and so on. This is standard procedure.
Make sure you contact a tax lawyer to help make your ABIL claim. Failures are often due to taxpayers’ filing claims without proper representation or from individuals who lack tax law knowledge and understanding of the proper procedures and documents required to make a successful claim.
Contact a lawyer at Kalfa Law to help you make a successful ABIL claim. You work hard for your money. We work hard for you to keep it ™.
-Shira Kalfa, BA, JD, Partner and Founder
© Kalfa Law 2019
The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.