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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:
 | shares of a small business corporation (SBC), or |
| debt 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:
| is treated differently from allowable capital losses in that it can be used to reduce all sources of income | ||||
|
is first deducted in the year it arises, and any
portion which cannot be deducted in this year
|
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:
| the SBC has become insolvent and the shares have a nil fair market value, or |
| 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 21700 of the personal income tax return.
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.
Related Articles
Canada Revenue Agency (CRA) Resources
CRA Guide T4037 Capital GainsChart showing how to calculate the ABIL
Capital losses and deductionsIT 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: November 05, 2024