Tax Tip[] ABIL

Will You be ABIL to Use Your Capital Gains Exemption?

“It is important to remember the interaction of ABILs and the CGE.”

Under the Income Tax Act, a “business investment loss” (BIL) is a capital loss resulting from a debt or share investment in a “small business corporation”. This is a Canadian-controlled private corporation that meets certain conditions relating to the use of its assets in an active business carried on in Canada (it need not actually be “small”).

Half of the BIL is called an “allowable business investment loss”, or ABIL. Unlike regular allowable capital losses (which can be deducted only against taxable capital gains), an ABIL is deductible against all types of income for up to 10 years. After that the ABIL becomes a net capital loss that can only be used against taxable capital gains.

ABILs provide preferential relief because they convert capital losses into losses that can be used against regular income such as business or employment income.  However, the Department of Finance decided that this preferential treatment is significant enough that it would be too generous to allow an individual to use their capital gains exemption (CGE) to the extent they had already claimed an ABIL.  Similarly, the  Department of Finance sees the CGE to be beneficial enough to require that the amount of ABIL that can be claimed be reduced to the extent of CGE that the taxpayer has used.  Therefore, the Income Tax Act has provisions preventing both kinds of deductions. In both cases there are mechanisms in place that provide for full ABIL or CGE claims once the losses or gains exceed the  ABIL’s or CGE’s claimed in prior years .

It is important to remember the interaction of ABILs and the CGE.  As noted in Tax Tip 10-15, we have seen cases where an individual crystallized their capital gains exemption to trigger a notional gain that was tax-free (without actually selling to a third party), and was dismayed to find out later that they couldn’t claim an ABIL on a real loss.  Similarly, if someone was expecting to be able to use the full capital gains exemption, they will be unpleasantly surprised if they find that a previous ABIL reduces their entitlement.

Please consult your TSG advisor for further assistance.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Allowable Business Investment Losses And The Capital Dividend Account

“An ABIL claimed by a corporation reduces the corporation’s CDA.”

The recent unfavourable economic conditions have resulted in many taxpayers incurring business investment losses. For tax purposes, a “business investment loss” is a capital loss from a disposition to a person whom the taxpayer was dealing at arm’s length (or a deemed disposition where a certain designation is filed), of one of the following:

  1. a share of the capital stock of a small business corporation (this loss can be claimed by individuals or corporations); or
  2. debt owing to an individual by a small business corporation; or
  3. debt owing to a corporation by a small business corporation, unless it is inter-corporate non-arm’s length debt.

A “small business corporation” does not actually have to be small. For business investment loss purposes, it is a Canadian-controlled private corporation substantially all of whose assets were used in an active business carried on primarily in Canada (or were shares or debt of other small business corporations) at any time in the 12 months prior to the disposition.

(The above descriptions are somewhat simplified.)

Half of a business investment loss is deductible as an “allowable business investment loss” (ABIL). Unlike a regular capital loss, an ABIL can be applied against any type of income (such as employment or investment income), not just taxable capital gains.

Even though an ABIL can be applied against any type of income, it is a net capital loss for purposes of computing the capital dividend account (CDA). This means that an ABIL claimed by a corporation reduces the corporation’s CDA. The CDA, which is the “untaxed half” of a corporation’s net capital gains plus certain other amounts, represents tax-free money that a shareholder can take out of a company. This reduction to the CDA arising from an ABIL claim is often overlooked.

Where a corporation is planning to claim an ABIL, it is important to consider the impact on the CDA. In some cases, paying out capital dividends before the ABIL is realized can result in significant tax savings.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Allowable Business Investment Losses – Payments to Individuals in Trust for Companies

“Payments to individuals on behalf of companies may still be ABIL.”

In the case of Brand (2005 DTC 1249), the taxpayer had lent money to his son and daughter-in-law that was to be used by their respective active companies. The facts agreed by both the CRA and the taxpayer were:

  • The taxpayer lent approximately $53,000 to his son and daughter-in-law.
  • The funds were immediately deposited by the son and daughter-in-law into the bank accounts of the companies owned by his son and daughter-in-law.

It was the taxpayer’s intention that the funds he had advanced were to be forwarded to the two active companies.

It is assumed that all the requirements to claim an allowable business investment loss (“ABIL”) were met. The only issue to be determined was whether the fact that the funds were paid to the son and daughter-in-law, instead of directly to their companies, would prevent the taxpayer from claiming an ABIL. It was the Minister’s position that the loans were made to the individuals and not to the companies so the ABIL claim was unavailable.

The Tax Court judge made an analysis of payments considered to be held in trust. He made it clear from his analysis that there can be a trust situation without written documentation. The son and daughter-in-law confirmed that the two companies planned to repay the borrowed funds. The Court determined that, when the son and daughter-in-law received funds from the taxpayer, they received the funds “in trust” for the companies. Accordingly, the judge determined that the taxpayer was entitled to claim an ABIL for the full amount of the loans, less repayments of about $6,000.

This is an interesting case because even though the funds did not go directly to the companies, the lender could still claim an ABIL. The Court was convinced that the funds were meant for the companies because the document that the son and daughter-in-law signed detailed how they would repay the taxpayer. Where funds have not been advanced directly to a company, there should be documentation evidencing the fact that the funds were to be passed on to the company if you want to claim an ABIL.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Allowable Business Investment Losses

“Issues To Consider.”

A business investment loss (BIL) arises from a disposition to which subsection 50(1) applies (elected disposition) or where the disposition is to an arm’s length person. The property disposed of must be a share of a small business corporation or a debt owing from a small business corporation. An allowable business investment loss (ABIL) is 50% of the BIL. Before one can determine if a loss is a BIL or not, it must first be a capital loss. As noted in previous Tax Tips, a capital property is a property that is income earning. Therefore, if an individual has an uncollectible loan to a company at no interest rate and there is no way for that lender to earn income from that loan, then it is not a capital property, not a capital loss and therefore not a BIL

If the asset is a capital property, then there must be a loss on the property. If an election is made under subsection 50(1), the loan must be uncollectible, the shares must be of a company that is insolvent.

Once it is determined that the asset is a capital property and there is a loss, the next analysis is whether or not the loan or share is in a “small business corporation.” Generally speaking, a small business corporation is a corporation where 90% of its assets are used in a Canadian active business. The test is not on a total value basis, instead, it is on an asset basis. Therefore, the only analysis done is on the asset side of the balance sheet. This is a very important test as some companies may no longer be a small business corporation at the time when the loss is incurred. There is, however, a rule that states that one can still claim a BIL if the company was a small business corporation within 12 months of the time that the BIL is claimed.

A common situation is when a wife lends funds to a husband’s company at no interest. Even if the husband’s company is a small business corporation, the wife will not be able to claim a BIL because the loan is not a capital property. If, however, the husband had loaned funds to its own corporation, then he would be able to claim the BIL because he is able to receive dividend income from the funds that he loaned in.

CRA appears to check almost all the ABIL claims made. Therefore, it is important that you have proper documentation showing that the shares or debt are with a company that is a small business corporation.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.