Allowable Business Investment Loss (ABIL)

A business investment loss arises as a result of the actual or deemed disposition of certain capital properties. It can happen when an individual disposes of one of the following to a person he/she deals with at arm’s length:

• a share of a small business corporation; or
• a debt owed to him/her by a small business corporation.

For business investment loss purposes, a small business corporation includes a corporation that was a small business corporation at any time during the 12 months before the disposition.

The individual may also have such a loss if he/she is deemed to have disposed of (for nil proceeds of disposition), a debt or a share of a small business corporation under any of the following circumstances:

• A small business corporation owes the individual a debt (other than debt from the sale of personal-use property) that is considered to be a bad debt at the end of the year.
• At the end of the year, the individual owns a share (other than a share he/she received as consideration from the sale of personal-use property) of a small business corporation that:
  • has gone bankrupt in the year;
  • is insolvent, and a winding-up order has been made in the year under the Winding-up Act; or
  • is insolvent at the end of the year and neither the corporation, nor a corporation it controls, carries on business. Also, at that time, the share in the corporation has a fair market value of nil, and it is reasonable to expect that the corporation will be dissolved or wound up and will not start to carry on business *.

*  The individual or a person that he/she does not deal with at arm’s length will be deemed to have realized an offsetting capital gain if the corporation, or a corporation it controls, carries on business within 24 months following the end of the year where the disposition occurred. The individual or the person will have to report the capital gain in the taxation year the corporation starts to carry on business. This applies if the individual or the person owned the share in the corporation at the time the business started.

The individual can elect to be deemed to have disposed of the debt or the share of the small business corporation at the end of the year for nil proceeds of disposition, and to have immediately reacquired the debt or the share after the end of the year at a cost equal to nil. To do this, the individual has to file an election with his/her return. To make this election, the individual must attach to his/her return a letter signed by him/her stating that subsection 50(1) of the Income Tax Act must apply.

The individual can deduct his/her ABIL from his/her other sources of income for the year. If his/her ABIL is higher than his/her other sources of income for the year, he/she must include the difference as part of his/her non-capital loss. If the individual incurred non-capital loss in 2003 or in prior years, he/she can carry a non-capital loss to the three previous years and to the seven subsequent years.

The individual can carry a non-capital loss incurred in taxation years ending after March 22, 2004 through December 31, 2005, to the three previous years and to ten subsequent years.

Although an individual can generally carry a non-capital loss arising in tax years ending after 2005, back three years and forward 20 years, this extension does not apply to a non-capital loss resulting from an ABIL. Instead, an ABIL that has not been used within ten tax years will continue to become a net capital loss in the eleventh year.

If the individual elects to carry a non-capital loss back to the preceding three taxation years, he/she must complete Form T1A, Request for Loss Carryback, and include it with the current taxation year return.

If the individual cannot deduct the ABIL arising in 2003 or prior years as a non-capital loss by the end of the seventh year, the unapplied part becomes a net capital loss. The individual can use this loss to reduce his/her taxable capital gains in the eighth year or any subsequent year.

The unapplied part of the individual’s non-capital loss resulting from an ABIL arising in 2004 or future years will become a net capital loss in the eleventh year.

An ABIL is a special type of capital loss for which one half of the loss can be deducted not only from capital gains but also from other income realized in the year.

A company share is considered to be an eligible small business share if all of the following conditions are satisfied:

• at the time of the sale, the share was a capital stock share of a corporation operating a small business that the taxpayer, his/her spouse or common-law spouse or a partnership that they were members of, held;
• in the course of the 24 months preceding the disposition, the share was held by the taxpayer, a partnership that he/she was a member of, or by a related person, and it was a share of a Canadian-controlled private corporation and more than 50% of the fair market value of the assets were:
  • elements used principally to operate a business that is a Canadian-controlled private corporation or a non-arm's length partnership, operating actively mainly in Canada;
  • certain shares or certain related corporate debt obligations;
  • a combination of both categories mentioned above; and
• In the course of the 24 months preceding the disposition, the share was not held by anyone except the individual, a partnership that he/she was a member of, or a related person.

To the extent that capital gains deductions were claimed in prior years, the ABIL must be reduced and the reduction treated as a “regular” capital loss. Prior year capital gains deductions come from Form T657, unless overridden. The capital loss attributable to the reduction of business investment losses is posted to line 17800 of Schedule 3.

If capital gains deduction claims have reduced ABIL in prior years, the capital losses which resulted offset the reduction of ABIL in the current year.