Allowable Business Investment Losses And The Capital Dividend Account
Volume No. 10-19
“An ABIL claimed by a corporation reduces the corporation’s CDA.”
The recent unfavourable economic conditions have resulted in many taxpayers incurring business investment losses. For tax purposes, a “business investment loss” is a capital loss from a disposition to a person whom the taxpayer was dealing at arm’s length (or a deemed disposition where a certain designation is filed), of one of the following:
- a share of the capital stock of a small business corporation (this loss can be claimed by individuals or corporations); or
- debt owing to an individual by a small business corporation; or
- debt owing to a corporation by a small business corporation, unless it is inter-corporate non-arm’s length debt.
A “small business corporation” does not actually have to be small. For business investment loss purposes, it is a Canadian-controlled private corporation substantially all of whose assets were used in an active business carried on primarily in Canada (or were shares or debt of other small business corporations) at any time in the 12 months prior to the disposition.
(The above descriptions are somewhat simplified.)
Half of a business investment loss is deductible as an “allowable business investment loss” (ABIL). Unlike a regular capital loss, an ABIL can be applied against any type of income (such as employment or investment income), not just taxable capital gains.
Even though an ABIL can be applied against any type of income, it is a net capital loss for purposes of computing the capital dividend account (CDA). This means that an ABIL claimed by a corporation reduces the corporation’s CDA. The CDA, which is the “untaxed half” of a corporation’s net capital gains plus certain other amounts, represents tax-free money that a shareholder can take out of a company. This reduction to the CDA arising from an ABIL claim is often overlooked.
Where a corporation is planning to claim an ABIL, it is important to consider the impact on the CDA. In some cases, paying out capital dividends before the ABIL is realized can result in significant tax savings.
TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.
The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.
TAX TIP is provided as a free service to clients and friends of Cadesky Tax.
The material provided in Tax Tip is believed to be accurate and reliable as of the date of posting. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Cadesky Tax cannot accept any liability for the tax consequences that may result from acting based on the contents hereof.
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