An allowable business investment loss (ABIL) is one-half of a business investment loss (BIL). The BIL is a capital loss incurred on dispositions of certain types of shares or debt. An ABIL is more useful in tax terms relative to a capital loss, in that it serves to offset all sources of income and not just capital gains. (Regular allowable capital losses normally only offset taxable capital gains.)
ABIL can arise on a disposition in the following circumstances:
It occurs on a loss on a disposition of a share or debt in a “Canadian-controlled private corporation” (CCPC) to an arm’s length person. The CCPC must be
- a “small business corporation” (see below),
- a bankrupt corporation that was a small business corporation at the time of bankruptcy, or
- a corporation that was insolvent and in the process of being wound up and was a small business corporation at the time that a winding up order was issued.
Alternatively, the BIL can arise on the disposition of this type of share or debt when there is a “deemed disposition” of the debt or share for nil proceeds at the end of a taxation year. In general terms, a deemed disposition for nil proceeds (thus triggering the BIL) will occur in the following circumstances:
- You make an election in your tax return for the year.
- In the case of a debt, the debt must have become bad in the year, generally meaning it is uncollectible and you have taken formal steps to write if off in your financial
- For a share, one of the following must be met: either (i) the corporation becomes bankrupt during the year; (ii) the corporation is insolvent and a windup order has been made in the year; or (iii) at the end of the year, the corporation is insolvent, it does not carry on a business, the fair market value of the share is nil, and it is reasonable to expect that the corporation will be dissolved or wound up and will not commence to carry on business.
A small business corporation is a CCPC where, at the time of disposition or any time in the preceding 12 months, all or substantially all of the corporation’s assets (on a fair market value basis) were (a) used principally in an active business carried on primarily in Canada, (b) shares or debt in other small business corporations (generally, it must own more than 10% of shares representing votes and value in the other corporation), or (c) a combination of assets described in (a) and (b).
A CCPC is generally a Canadian private corporation that is not controlled by non-residents, public corporations, or a combination thereof.
An unused ABIL from one taxation year can be carried forward ten years to offset taxable capital gains plus all sources of income in those years. After the tenth future year, the ABIL becomes a net capital loss, which can be used only to offset taxable capital gains in future years.
ABIL reduced by previous capital gains exemption
If you claimed the capital gains exemption in a previous taxation year, the amount of your BIL in the current year is reduced. Basically, the amount of the BIL is reduced on a dollar-for-dollar basis by the total capital gains previously sheltered by the capital gains exemption.
The reduced portion of the BIL remains an ordinary capital loss, so one-half of it becomes an allowable capital loss that can be used against taxable capital gains.
Example
In 2016, you claimed the capital gains exemption on $50,000 of taxable capital gains / $100,000 capital gains. In 2017, you dispose of small business corporation shares and the resulting $120,000 capital loss meets the qualifications of a BIL.
The BIL is reduced by the $100,000 capital gains previously sheltered by the capital gains exemption, from $120,000 to $20,000. Therefore, your ABIL is $10,000 and this amount will offset all sources of income. The remaining $100,000 loss becomes an ordinary capital loss, and half of that, or $50,000, is an allowable capital loss that can only offset taxable capital gains.