An ABIL is a special type of allowable capital loss that is subject to preferential tax treatment. The special rule relating to an ABIL is that, unlike an ordinary allowable capital loss, it is deductible against all sources of income and not just taxable capital gains. Generally speaking, other allowable capital losses can be deducted only against taxable capital gains.
What is an ABIL? It is one-half of a “business investment loss”, which in turn is a capital loss incurred on certain dispositions of debt or shares in small business corporations. The details follow.
Business Investment Loss From Actual Disposition
A business investment loss includes a capital loss from an actual disposition to an arm’s length person (generally, a person not related to you) of
- a share of the capital stock of a small business corporation, or
- debt in a Canadian-controlled private corporation (CCPC) that is
- a small business corporation,
- bankrupt and that was a small business corporation at the time it became a bankrupt, or
- a corporation that was insolvent and a small business corporation at the time a winding-up order was made in respect of the corporation.
For these purposes, a CCPC is generally a Canadian private corporation that is not controlled by nonresidents or public corporations or a combination thereof. Thus, for example, a private Canadian corporation controlled by Canadian individuals will normally qualify as a CCPC.
In general terms, a small business corporation is a CCPC, all or substantially all of the fair market value of the assets of which is attributable to assets used principally in an active business carried on primarily in Canada by the corporation or by a corporation related to it, or debt or shares in other small business corporations. The CRA takes the view that “all or substantially all” normally means 90% or more. Although these criteria can be met at the time of the disposition of the shares or debt of the corporation, the corporation can qualify as a small business corporation if it meets the criteria at any time in the 12 months preceding the disposition of the shares or debt.
Business Investment Loss From Deemed Disposition
Additionally, a loss on a “deemed disposition” of the debt or shares as described above can qualify as a business investment loss. A deemed disposition will occur if you make an election in your tax return for a year in respect of
- A debt owing to you at the end of a taxation year that is established to be a “bad debt” (it is uncollectable) in the year, or
- A share in a corporation owned at the end of the year, where
- the corporation has become bankrupt during the year,
- the corporation is insolvent and a “winding up” order has been made in the year, or
- the corporation is insolvent, neither the corporation nor a corporation controlled by it carries on 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.
Basically, when you make the election you will have a deemed disposition for nil proceeds, which will result in a capital loss on the share or debt, thus leading to the business investment loss.
Use of ABIL
As noted, an ABIL can be used to offset all sources of income in a year and not just taxable capital gains. Essentially, it is treated as a non-capital loss rather than a net capital loss. Also, it must be applied against all income for the current year to bring income to zero, even if no tax would otherwise be payable.
If there are excessive (unused) ABILs in a year, they can optionally be carried back three years or forward ten years to offset any amount of income from any source in those years. However, after the tenth year forward, the ABIL leaves the pool of noncapital losses and rejoins the pool of net capital losses which can be deducted only against taxable capital gains in any year from that point on.
ABIL Reduced by Capital Gains Exemption
The amount of your ABIL is reduced to the extent that you previously claimed the capital gains exemption. That exemption allows you to receive tax-free capital gains of up to (for 2016) $824,176 ($412,088 taxable capital gains) during your life-time from disposition of certain types of property such as qualified small business corporation shares (there is now a $1 million limit for qualified farm or fishing property).
The reduced business investment loss remains a capital loss, one-half of which is an allowable capital loss that can be deducted against taxable capital gains.
Some years ago, John claimed the capital gains exemption in respect of $50,000 of capital gains ($25,000 of taxable capital gains). He has not otherwise claimed the exemption. In 2015, John incurred a business investment loss of $110,000 on the sale of small business corporation shares.
John’s business investment loss of $110,000 will be reduced by $50,000 to $60,000. One-half of that amount, or $30,000, will be deductible against all sources of income. The remaining $50,000 portion of the loss will be an ordinary capital loss. One-half of that, or $25,000, will be deductible against taxable capital gains only.