Business Income

Understanding Business Investment Losses

A business investment loss is a specific type off loss that can occur when you sell or get rid of shares in a small business corporation, or when a debt is owed to you by a small business corporation. This loss is also commonly referred to as an Allowable Business Investment Loss or ABIL.

What Qualifies As a Business Investment Loss?

If you own shares in a small business corporation that has gone bankrupt during the year, it may have been considered disposed of for zero proceeds.

Examples of this include businesses that are insolvent — unable to pay debts — and have had a winding-up order — a court order that forces an insolvent company into liquidation. It also includes businesses that are insolvent at the end of the year but are continuing to operate.

Another example of a situation in which a business investment loss can be claimed occurs when a small business corporation owes you a debt that it is unable to pay at the end of the year.

You are allowed to make a filing with the Canada Revenue Agency (CRA) to have deemed disposition of the debt or shares. A deemed disposition is a term used when an individual is considered to have disposed of a property even though no actual sale has taken place, meaning it is for nil proceeds. Once you have filed with the CRA, you then elect to dispose of the shares or debt for zero proceeds and claim the loss as the amount of your investment or the amounts that are owing.

How Can You Utilize a Business Investment Loss?

You may be able to deduct half of the investment business loss from your income. The actual amount of loss you deduct is your ABIL.

For example, if you own shares that cost you $10,000 and you deem to dispose of them for nil, you have a business investment loss of $10,000 ($10,000 – $0 = $10,000). Your ABIL is then $10,000 x 50 percent = $5,000 that you can apply to your current annual income.

If your ABIL is more than your income from the year, you can include the additional amounts as part of your non-capital losses for the year. Non-capital losses can be carried forward up to 10 and back up to three years. By carrying the loss back to prior years, you can adjust your past tax returns and reduce income from those years using a form T1A, Request for Loss Carry Back.

Claims for ABIL must include a thorough note to CRA that can be sent along with your income tax return. The note should declare the name of the small business corporation, the number and class of shares or type of debt disposed of, the date of either insolvency, bankruptcy, or wind-up, the date when you purchased shares or debt, the proceeds on disposition, the cost base, any expenses incurred on the disposition, and the actual amount of the loss.