What is an Allowable Business Investment Loss (ABIL) and what are the tax implications?
The Canadian government wants to encourage investment in Canadian Controlled Private Corporations carrying on active business in Canada. As a result, if you invest in such a business and experience a loss, you may be able to offset your income from other sources with a portion of that loss by claiming an ABIL.
An ABIL arises when there is a capital loss from a disposition of shares and other investment in a small business corporation. This can include loans to the corporation. Typically, when a Canadian Controlled Private Corporation has been wound up during the year, with an amount of money owing to the shareholder, the shareholder may be able to claim an ABIL on the amount owed. Generally speaking, 50% of the ABIL can be used to offset taxable income of the shareholder and can be carried back three years and carried forwards seven years.
The success of claiming an ABIL usually depends on the paper trail. Below is a list of information that will need to be documented in the claim:
- The amount of the investment, including shares and loans—this will generally need to be supported with financial statements, cancelled cheques or loan agreement.
- The exact details of how the investment was made. This would be a share purchase or in the case of a loan, each and every injection that became part of the loan.
- The amounts and dates of the repayments that have been made against the principal amount of the loan (if any).
- A description of your attempts to recover the money you advanced to the corporation—did you have any legally registered loans?
If you guaranteed a loan acquired by the corporation, indicate the following:
- Whether or not there was a legal obligation for you to pay the corporation’s debt.
- The date the first payment of the guarantee was payable and the dates and amounts of the repayments—usually providing collection letters and legal documents suffices here.
If you think you are eligible to claim an Allowable Business Investment Loss, please contact us to determine whether there is a cost benefit.Download a copy of this issue