Allowable Business Investment Loss

Introduction

An Allowable Business Investment Loss (ABIL) is a type of loss that comes from the sale or liquidation of shares from a Small Business Corporation (similar definition for the Qualified Small Business Corporation Shares).  What makes it unique is that the loss can be deducted against any other income, not just capital gains. An ABIL is recognized once one of the two following events occurs either:

·       during a real disposition in favour of a person dealing at arm's length, or

·       on a deemed disposition (where an election has been made under ITA 50(1)).

A Small Business Corporation is a corporation that is a Canadian-controlled private corporation all or substantially all (90% and more) of the fair market value of the assets of which at that time is attributable to assets that are:

a)      used principally in an active business carried on primarily (50% and more) in Canada by the particular corporation or by a corporation related to it,

b)      shares of the capital stock or indebtedness of one or more small business corporations that are at that time connected with the particular corporation (within the meaning of subsection 186(4) on the assumption that the small business corporation is at that time a payer corporation within the meaning of that subsection), or

c)      assets described in paragraphs (a) and (b).

For business investment loss purposes, a small business corporation includes a corporation that was a small business corporation at any time during the 12 months before the disposition.

Eligibility Conditions

In order to claim an ABIL, the following conditions must be met [ITA 39(1)(c)]:

a)      a Small Business Corporation owes a debt (other than a debt from the sale of personal-use property) that is considered to be a bad debt at the end of the year.

b)      at the end of the year, a share (other than a share you received as consideration from the sale of personal-use property) of a small business corporation that:

•           has gone bankrupt in the year,

•           is insolvent, and a winding-up order has been made in the year under the Winding-up Act,

•           is insolvent at the end of the year and neither the corporation, nor a corporation it controls, carries on business. Also, at that time, the share in the corporation has a fair market value of nil, and it is reasonable to expect that the corporation will be dissolved or wound up and will not start to carry on business.

*Any ABIL that is reduced by the Capital Gains Deduction converts into a capital loss [ITA 39(9)].

As mentioned above, ABIL can be claimed against any income. Any excess amount above net income becomes a non-capital loss [“non-capital loss” ITA 111(8)], and can be carried back 3 years, or carried forward 10 years [ITA 111(1)(a)]. If the carry forward amount is not used within 10 years, the non-capital loss converts to a net capital loss [“net capital loss” ITA 111(8)].