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Business Investment Loss

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Filing Your Return   ->   Capital Gains and Losses
     Business -> Business investment loss

Business Investment Loss

Income Tax Act s. 38(c), 39(1)(c), 39(9), 50(1), 111(1)(a), 111(8)

A business investment loss is a capital loss arising from an arm's length disposition of:

bulletshares of a small business corporation (SBC), or
bulletdebt owed to the taxpayer by a small business corporation

50% of the business investment loss can be used to reduce taxable income, as an allowable business investment loss (ABIL), which:

bullet is treated differently from allowable capital losses in that it can be used to reduce all sources of income
bullet is first deducted in the year it arises, and any portion which cannot be deducted in this year
bullet can be carried back 3 years and carried forward 10 years (7 years for ABIL arising in 2003 or earlier years) as a non-capital loss
bullet if unused after 10 years (7 years for ABIL arising in 2003 or earlier years) can then be treated as a net capital loss and carried forward indefinitely to be deducted against taxable capital gains

A loss may not qualify as a business investment loss under certain circumstances, such as when a capital gains deduction has been claimed in prior years.

Worthless Shares or Debt

A taxpayer can elect under s. 50(1) to have disposed of the above shares or debt for nil proceeds and to have reacquired the shares or debt  immediately after the end of the year for nil cost if:

bullet the SBC has become insolvent and the shares have a nil fair market value, or
bullet the debt of the SBC has been established to be a bad debt

The advantage of this is that the taxpayer can write off the investment while still retaining ownership.  The investment may be worth something in the future.  If the loss is from debt owed to the taxpayer by the corporation, the taxpayer may use the corporation for starting another business in the future, at which time the debt could be recovered, because it would still be recorded on the books of the corporation.  Any recovery of amounts previously deducted would have to be included in income.

The allowable business investment loss is claimed on line 217 of the personal income tax return.

For the tax treatment of worthless publicly traded shares or debt, see our article Worthless Shares or Debt.

There are many factors to be considered when selling a business, to determine the best disposition method.  Professional advice can be very valuable in this regard.

CRA Resources:

CRA Guide T4037 Capital Gains

Chart showing how to calculate the ABIL

IT 484R2 Business investment losses (Archived)

IT 442R Bad debts and reserve for doubtful debts (Archived) - for help in determining when a debt is established to be a bad debt

Tax Tip:  Before investing in or selling any business, get professional advice.

Revised: September 19, 2017

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