Allowable Business Investment Losses

“Issues To Consider.”

A business investment loss (BIL) arises from a disposition to which subsection 50(1) applies (elected disposition) or where the disposition is to an arm’s length person. The property disposed of must be a share of a small business corporation or a debt owing from a small business corporation. An allowable business investment loss (ABIL) is 50% of the BIL. Before one can determine if a loss is a BIL or not, it must first be a capital loss. As noted in previous Tax Tips, a capital property is a property that is income earning. Therefore, if an individual has an uncollectible loan to a company at no interest rate and there is no way for that lender to earn income from that loan, then it is not a capital property, not a capital loss and therefore not a BIL

If the asset is a capital property, then there must be a loss on the property. If an election is made under subsection 50(1), the loan must be uncollectible, the shares must be of a company that is insolvent.

Once it is determined that the asset is a capital property and there is a loss, the next analysis is whether or not the loan or share is in a “small business corporation.” Generally speaking, a small business corporation is a corporation where 90% of its assets are used in a Canadian active business. The test is not on a total value basis, instead, it is on an asset basis. Therefore, the only analysis done is on the asset side of the balance sheet. This is a very important test as some companies may no longer be a small business corporation at the time when the loss is incurred. There is, however, a rule that states that one can still claim a BIL if the company was a small business corporation within 12 months of the time that the BIL is claimed.

A common situation is when a wife lends funds to a husband’s company at no interest. Even if the husband’s company is a small business corporation, the wife will not be able to claim a BIL because the loan is not a capital property. If, however, the husband had loaned funds to its own corporation, then he would be able to claim the BIL because he is able to receive dividend income from the funds that he loaned in.

CRA appears to check almost all the ABIL claims made. Therefore, it is important that you have proper documentation showing that the shares or debt are with a company that is a small business corporation.

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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.

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Cadesky Tax