Small business is big business in Canada. As of December 2019, a whopping 97.9% of Canada’s 1.23 million employer businesses were small businesses (defined as having 1-99 employees). They employed 68.8% of the total private labour force. Canada adds approximately 100,000 new businesses each year but the survival rate in Canada of a business after eight years is roughly 50%.
If you have invested in your own business or that of a family member and are faced with the reality that there is no chance of recovering your investment, there is still a way to recoup some of your money in the form of reduced income taxes.
Understanding Allowance Business Investment Losses
The Income Tax Act (Canada) allows for a deduction of losses called the Allowable Business Investment Loss (ABIL). If you have invested in a small business corporation by way of purchasing shares of the corporation or having made a loan to the corporation you may be entitled to claim an ABIL and reduce your overall tax burden.
If the corporation in which you have made an investment has become insolvent, bankrupt or has proceeded with the process of winding down, your investment will in all likelihood have no remaining value. Normally under Canadian income tax rules you would claim a capital loss for the amount invested. Capital losses can only be used to reduce income from capital gains. ABIL, however, is a type of capital loss that gets preferred tax treatment in that it can be deducted against all sources of income. If you do not have enough income in the year to use all of the ABIL then you can deduct it in any one of the three previous taxation years or carry it forward for ten years. If it is still not deducted then it becomes a regular capital loss and can be carried forward indefinitely.
Do you qualify for an ABIL?
To qualify for an Allowable Business Investment Loss and receive this preferred tax treatment the investment must have been made in a corporation that is a small business corporation. In other words, it must have earned income from an active business in Canada. Active business includes most business income other than those of a passive nature deriving income from property, including interest, dividends, rents, or royalties. In addition, the corporation invested in must also be a Canadian Controlled Private Corporation, being any corporation that is a Canadian private corporation that is not controlled by a non-resident or a public corporation.
If the corporation you invested in meets these conditions you may be eligible to claim an ABIL. In order to do so the corporation must have ceased active business operations and the shares must have no value or the loan cannot be repaid to you. The amount that can be deducted by you as an ABIL is one half the amount invested (the loss amount) in the corporation. Feel free to reach out to our team to help you determine whether you may be eligible to claim an ABIL, and how to calculate the loss amount.
As with most business transactions it is vital to keep proper records and documentation, as in the event the CRA reviews a claim for an ABIL it is important to have the information readily available.
This article is a general discussion of certain tax and accounting matters and should not be relied upon as tax or accounting advice. If you require tax or accounting advice we would be pleased to discuss the issues in this article with you.
