A business investment loss (BIL) arises on the sale or other disposition, at a loss, of:
- A share of a small business corporation (SBC).
- A debt owing to a taxpayer by a Canadian-controlled private corporation (CCPC) that is either an SBC, a bankrupt that was an SBC, or a corporation referred to in Winding-up and Restructuring Act (WURA), R.S.C. 1985, c. W-11, section 6, that was insolvent within the meaning of WURA and was an SBC at the time of its winding-up order under WURA.
An ABIL is equal to 50% of a taxpayer’s BIL (that is, an ABIL is equal to 50% of the ACB of the share, or the principal amount of the debt, minus any proceeds received on the disposition).
The major advantage of an ABIL, as compared to a regular allowable capital loss, is that it is fully deductible against a taxpayer`s other sources of income (or capital gains). If not deducted in the year incurred, an ABIL is treated as a non-capital loss (rather than as a capital loss) that may carried back for three years and forward for ten years to offset income or gains in those years. The purpose of the rules relating to ABILs is to encourage investment in SBCs by giving losses in respect of such investments more generous tax treatment than that available for ordinary capital losses.
For a loss described above to qualify as a BIL, certain additional conditions must be met. In particular, the disposition of the shares or debt must be to an arm’s-length person or be deemed to have occurred under Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), section 50(1). Where section 50(1) applies in respect of a share or debt held by a taxpayer, the taxpayer is deemed to have disposed of the share or debt at the end of the taxation year for nil proceeds and to have immediately reacquired the property at a cost of nil (thereby triggering the loss for tax purposes). For section 50(1) to apply, a taxpayer must elect (see CRA Guide T4037 Capital GainsOpens in a new window for election instructions) in their income tax return for the year to have the provision apply. Also, in the case of a debt, it must be owing to the taxpayer at the end of the tax year, and the taxpayer must have established it to have become a bad debt in the tax year. In the case of a share, the taxpayer must own the share at the end of the tax year and the corporation must have become a bankrupt in the tax year or be insolvent and subject to a winding-up order under WURA.
The time at which a debt becomes a bad debt is a question of fact. Generally, a debt owing to a taxpayer will be considered a bad debt if the taxpayer has exhausted all legal means of collecting the debt or the debtor has become insolvent and has no means of repayment.
A capital loss resulting from a disposition by a corporation of a debt owing to it by an SBC with whom the corporation does not deal at arm’s length does not qualify as a BIL (Income Tax Act, section 39(1)(c)(iv)).
For further discussion of the ABIL rules, see Income Tax Folio S4-F8-C1, Business Investment Losses