Tax Tips When Business Investment Losses Occur

It’s been a long wait for CRA to publish the folio regarding Business Investment loss. The new folio consolidates the content of the former interpretation and cancels Interpretation Bulletin IT-484R2.

In general, 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 an SBC. One-half of this loss is an allowable business investment loss (ABIL). A loss that qualifies as an ABIL must be treated as an ABIL. The taxpayer cannot, instead, choose to treat it as a capital loss.

A non-capital loss arising from an ABIL can be carried back three years and forward up to 10 years to be deducted in calculating taxable income of such other years. Any such loss that is not deducted by the end of the 10 -year carryforward period is then treated as net capital loss, which can be carried forward indefinitely to be deducted against taxable capital gains.

A taxpayer can elect under s50(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 for the SBC in insolvent situation or debt established 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 or the debt could be recovered in the future. The purpose of the rules relating to the business investment loss is to encourage investment in SBCs by giving such losses more generous tax treatment than that available for ordinary capital losses.

The discussion and interpretation of the folio also provide many examples that 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, debt is from non-arm’s party and loss not a qualified capital loss.

If you are using ProFile T1 to prepare an income tax return and an ABIL is determined, a business loss is entered in the ABIL worksheet and an QBIL amount is calculated in the worksheet. The amount of ABIL flows to line 127 of T1 jacket. Any unused amount of ABIL will be calculated with income (loss) from all other sources together in T1A and carried to Non-Capital losses carryforward worksheet.