Will You be ABIL to Use Your Capital Gains Exemption?
Volume No. 12-34
“It is important to remember the interaction of ABILs and the CGE.”
Under the Income Tax Act, a “business investment loss” (BIL) is a capital loss resulting from a debt or share investment in a “small business corporation”. This is a Canadian-controlled private corporation that meets certain conditions relating to the use of its assets in an active business carried on in Canada (it need not actually be “small”).
Half of the BIL is called an “allowable business investment loss”, or ABIL. Unlike regular allowable capital losses (which can be deducted only against taxable capital gains), an ABIL is deductible against all types of income for up to 10 years. After that the ABIL becomes a net capital loss that can only be used against taxable capital gains.
ABILs provide preferential relief because they convert capital losses into losses that can be used against regular income such as business or employment income. However, the Department of Finance decided that this preferential treatment is significant enough that it would be too generous to allow an individual to use their capital gains exemption (CGE) to the extent they had already claimed an ABIL. Similarly, the Department of Finance sees the CGE to be beneficial enough to require that the amount of ABIL that can be claimed be reduced to the extent of CGE that the taxpayer has used. Therefore, the Income Tax Act has provisions preventing both kinds of deductions. In both cases there are mechanisms in place that provide for full ABIL or CGE claims once the losses or gains exceed the ABIL’s or CGE’s claimed in prior years .
It is important to remember the interaction of ABILs and the CGE. As noted in Tax Tip 10-15, we have seen cases where an individual crystallized their capital gains exemption to trigger a notional gain that was tax-free (without actually selling to a third party), and was dismayed to find out later that they couldn’t claim an ABIL on a real loss. Similarly, if someone was expecting to be able to use the full capital gains exemption, they will be unpleasantly surprised if they find that a previous ABIL reduces their entitlement.
Please consult your TSG advisor for further assistance.
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.