Business Investment Loss

In today's economy, more and more taxpayers have investments that have decreased in value or even become worthless. Where such investments are made in private corporations, the investors may be entitled to a special type of loss known as a business investment loss (BIL). A BIL is a type of capital loss with one important advantage.

Advantage to claiming a business investment loss

Unlike regular capital losses that may only be applied against capital gains, a BIL can be applied against any source of income. The deductible portion, which is equal to 50% of the loss, is called an allowable business investment loss (ABIL). If this loss exceeds other sources of income for the current year, the remainder becomes a non-capital loss for that year, and can be carried back three years and carried forward ten years. If it cannot be deducted within ten years, it becomes a net capital loss that can be applied against future taxable capital gains. 

When does a loss become a BIL?

A BIL occurs when a taxpayer disposes (or is deemed to dispose) of either of the following types of qualifying property:

• debt owed by a small business corporation; and
• shares of a small business corporation.

Qualifying property - debt owed by a small business corporation

A "bad" debt owed by a small business corporation to the taxpayer at the end of the taxation year may be claimed as a BIL. A small business corporation is generally a Canadian-controlled private corporation that has 90% or more of its assets used in an active business carried on in Canada. For BIL purposes, it is sufficient to meet the small business corporation criteria at any time within the twelve months preceding the disposition.

Qualifying property - shares of a small business corporation

A BIL may also be claimed with regard to shares of a small business corporation (as defined above), owned by the taxpayer at the end of the taxation year, that is bankrupt, insolvent, or will likely be dissolved or wound-up (and has a nil value).

Methods of recognizing the loss

Disposition to third party

A BIL may be claimed where one disposes of qualifying shares or debt to a third party. This is typically difficult to do, as the value of the qualifying property is nil.

Deemed disposition

The most common way to recognize a BIL is to have a deemed disposition. Typically, if the qualifying property is worthless, it may not be sold to a third party. Consequently, there are special rules that allow these properties to have a deemed disposition for proceeds of nil.

Procedure for claiming a BIL

BILs must be recorded on a taxpayer's personal tax return. In addition, for a deemed disposition to occur, the taxpayer must file an election stating that he or she wants the deemed disposition rules to apply. The election letter is filed with the income tax return.

The Canada Revenue Agency tends to audit BILs regularly. Proper supporting documentation is thus very important.

If you feel you are facing a business investment loss, contact your Collins Barrow advisor for assistance. There are many factors to consider and calculations to perform. We can help.

Todd Zanatta, CA, is a Tax Partner and Leanne Smith is a Tax Technician in the Sudbury-Nipissing office of Collins Barrow.