January 2022 Newsletter

ABIL not allowed

In general terms, you can have an allowable business investment loss (ABIL) if you have a loss on a loan to a Canadian‑controlled private corporation that is also a small business corporation. Other conditions can apply.

An ABIL is a type of an allowable capital loss (which is half of an actual capital loss). The main difference is that an ABIL can be used to offset all sources of income, whereas a regular allowable capital loss can normally offset only taxable capital gains and not other sources of income.

In the recent case of Dias, the taxpayers lent money to a numbered corporation (“201”). 201 was not a small business corporation. 201 in turn lent some money to two small business corporations. The taxpayers incurred a loss on their loan to 201. They claimed an ABIL, taking the position that 201 was merely a “conduit”, and that their loan ultimately went to the small business corporations. The CRA disagreed on the grounds that the taxpayers’ loan was to 201, which was not a small business corporation, and therefore the requirements for the ABIL were not met. On appeal to the Tax Court of Canada, the Tax Court judge held in favour of the CRA and disallowed the ABIL. The judge did not buy into the “conduit” argument, largely because the loan from the taxpayers to 201 did not “match” the loans from 201 to the small business corporations.

Last modified on January 17, 2022 12:00 am
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