Income Tax Act Subsection 3(d), 38(c), 39(1)(c), 40(2)(g)(ii), and 50
An allowable business investment loss (“ABIL”) is half of a capital loss, which was incurred on the sale of shares, or a debt of a small business corporation. The importance of receiving and ABIL rather than a capital loss is that an ABIL is deductible against any other source of income, not just capital gains.
Justice Bowman created a four-point test used to determine whether the loss is an ABIL.
- Did the taxpayer invest in shares or debt of a corporation?
- If the investment is debt, and not owed to a corporation with which the debtor corporation does not deal at arm’s length, has the debt been established to be bad as required under paragraph 50(1)(a)? If the investment is a share, has the share become worthless in the circumstances referred to in paragraph 50(1)(b), or has it been sold at a loss in an arm’s-length transaction?
- Was the property (share or debt) issued by a small business corporation as defined in part XVII of the Act?
- Was the property acquired by the taxpayer for the purpose of earning income as required under subparagraph 40(2)(g)(ii)?
CRA Resources
What is a business investment loss?
What happens when you have an ABIL?
Chart 6 – How to claim an ABIL
Form T1A, Request for Loss Carryback
Income Tax Folio S1-F5-C1, Related persons and dealing at arm’s length
IT232, Losses – Their deductibility in the loss year or in other years
IT484, Business investment losses
Case law
Coveley v Canada, 2014 FCA 281 – When is a Debt a “Bad Debt”?
Detailed Case law analysis may be found here: http://ita-annotated.ca/RecentDecisions/category/substantive-provision/allowable-business-investment-loss/