It is likely that you, or somebody you know, have invested in a small business and that money is now gone – either partially or entirely. Losing money on any investment is not a good thing. However, there is probably a tax break available to you so that not all is lost. In comes the Business Investment Loss (BIL).
Advantages of a BIL
The tax advantages of a capital loss are restricted as they can only be applied against capital gains. The advantage of an Allowable Business Investment Loss (i.e., the allowable portion (50%) of the BIL) is that it can be applied against any source of income.
If the ABIL exceeds the other sources of income in the year of the claim, the excess can be carried back three years and carried forward ten years. Additionally, if there is no income with the three preceding or ten subsequent years to fully utilize the ABIL, the balance becomes a capital loss which can be carried forward indefinitely and applied to capital gains in future years.
When does a loss become a BIL?
A loss becomes a BIL when a taxpayer disposes of (or is deemed to have disposed of) shares or debt in a Small Business Corporation (SBC). A SBC is generally a Canadian-controlled private corporation that has 90% or more of its assets used in active business carried on in Canada.
Shares of a SBC
An investment in a qualifying business may have been made in the form of share ownership. A BIL may be claimed if shares of capital stock of the corporation are owned by the taxpayer at the end of the taxation year and the corporation is bankrupt, insolvent, or likely to be dissolved or wound-up (and has nil value).
Debt owed by a SBC
An investment in the qualifying business may have been made in the form of a loan (i.e., debt). If it is determined that the debt owing to the taxpayer at the end of the taxation year has become a bad debt in the year, then the amount may be claimed as a BIL..
What triggers a BIL?
A BIL may be triggered when a taxpayer actually disposes of the shares or debt to a third party. However, since the value of investment is worthless, this is rare.
A BIL is most often claimed by way of deemed disposition. Canada Revenue Agency (CRA) recognizes that the worthless investment value of the shares or debt cannot likely be sold to a third party, and the Income Tax Act (ITA) accommodates that fact accordingly with rules that permit deemed dispositions.
How to claim a BIL
The procedure for claiming an ABIL is really quite simple. There are basically two steps that must be taken. A taxpayer must claim the ABIL on their personal tax return (i.e., line 217), and, for an election must be filed under section 50(1) of the ITA. The election is filed along with the taxpayer return and simply indicates to CRA that they are electing under the deemed disposition rules.
Documentation supporting the claim is extremely important. It is common for CRA to audit ABIL claims, and a claim should be fully supporting with documentation and facts.
Contact Deuzeman & Associates
We hope that all of your investments are successful, however, in the unfortunate event that you incur a loss, there is an opportunity to soften the hit.
Preparing, claiming, and supporting an ABIL claim is a process that must be carried out very carefully. We would be pleased to assist you and guide you through the process from start to finish.