In most instances, Canada’s tax system taxes net income, which means that expenses are deducted from revenues. For employees, payroll remittance and deductible expenses are specifically set out in categories with conditions. For business income and property income, any day-to-day operational expense is deductible so long as the expense is incurred “for the purpose of gaining or producing income”, is reasonable, and is not otherwise specifically disallowed.
Because business expenses are deductible, the system contemplates instances where the expenses are more than the revenue, and losses result. You can carry losses back and forward within limits. This makes losses valuable and important because it helps even out the tax burden over a number of years.
The Income Tax Act singles out certain forms of investment in small businesses for more favourable tax loss treatment. Usually, investments are capital property that give rise, when there is a loss, to a capital loss. Capital losses are only half-deductible and then only against taxable capital gains, making their use less valuable.
But when you have a Business Investment Loss that meets certain conditions, the loss is treated more favourably. Half of the loss is deductible from any other form of income, whether employment, business, property, or capital gains. This half is called the Allowable Business Investment Loss or ABIL.
When is the ABIL Applicable?
Allowable Business Investment Losses can only result where the taxpayer disposes of property to a person he or she deals with at arm’s length. This excludes immediate family and persons who have a common economic interest with the taxpayer.
The property is not just any property, but has to be either a share of a small business corporation or the debt owing by a Canadian-controlled private corporation (CCPC) that is a small business corporation.
So, although an allowable business investment loss is a capital loss, it can be applied against any other source of income. This special treatment, however, is somewhat restricted.
ABIL vs Non-Capital Losses
Like other losses, a taxpayer can carry back the loss for three years and recover taxes paid in those years if he or she cannot use the loss in the current year.
However, unlike non-capital losses that can be carried forward for 20 years and capital losses that can be carried forward indefinitely, allowable business investment losses can only be carried forward for 10 years. If they are not used within 10 years of being incurred, then the loss falls away and is lost forever.
Related Definitions and Terms
- Small Business Corporation (SBC)
A Canadian-controlled private corporation (CCPC) where all or substantially all (90% or more) of the fair market value of its assets are used in an active business carried on primarily in Canada. Only investments in SBCs can generate a valid BIL or ABIL.
- Canadian-Controlled Private Corporation (CCPC)
A private corporation that is resident in Canada, not controlled by non-residents or public corporations, and typically eligible for the small business deduction. Most small business corporations qualify as CCPCs.
- Arm’s Length Relationship
A relationship in which the parties act independently and in their own interests, such as between unrelated investors and a company. Losses from non–arm’s length transactions (e.g., between family members or controlled entities) often don’t qualify for BIL treatment.
- Adjusted Cost Base (ACB)
Adjusted cost base is the original cost of an investment, adjusted for additions (like reinvested amounts or legal fees) and reductions (like returns of capital). It’s used to calculate the capital loss portion of a BIL.
- Disposition
The sale, transfer, or deemed disposal of property, including shares or debt. For BIL purposes, a disposition may also occur through bankruptcy, liquidation, or by election under subsection 50(1) when an investment becomes worthless.
- Subsection 50(1) Election
A tax election that allows an investor to treat worthless shares or debt as if they were disposed of at the end of the tax year for nil proceeds, letting the loss be recognized immediately rather than waiting for formal dissolution.
- Active Business
A business that earns income from providing goods or services, as opposed to earning mainly investment income. For a corporation to qualify as a small business corporation, it must primarily operate an active business in Canada.
- Non-Capital Loss
A loss that can be applied against any type of income (employment, business, rental, etc.). An ABIL that exceeds your total income for the year becomes a non-capital loss, which can be carried back 3 years or forward 10 years.
Calculating an Allowable Business Investment Loss
Determining the amount of a Business Investment Loss (BIL) isn’t as simple as comparing what you invested versus what you got back. The calculation involves a few structured steps and some important tax adjustments to arrive at the amount you can actually claim.
Step 1. Identify the Di8sposition or Worthlessness
A BIL can only be claimed when your investment in a small business corporation has either been disposed of (for example, you sold your shares or the company went bankrupt) or is deemed worthless under the Income Tax Act. The timing of that event is critical; it determines the taxation year in which the loss is recognized.
For shares, this typically means the company has ceased operations, is insolvent, and has no reasonable chance of recovery. For debt, such as a loan to a small business, the CRA considers it a loss when the debt becomes clearly uncollectible.
Step 2. Determine the Adjusted Cost Base (ACB)
Once it’s clear that the investment has been lost or disposed of, the next step is to determine its Adjusted Cost Base (ACB), essentially, what you originally paid for the shares or loan, plus any additional qualifying costs.
If you’ve made capital contributions over time or incurred expenses directly related to acquiring the investment (like legal fees), those can increase your ACB. Conversely, any previous returns of capital or partial repayments would reduce it.
Step 3. Calculate the Capital Loss
The Capital Loss is the difference between the ACB and the amount (if any) you received on disposition.
Capital Loss = ACB − Proceeds of Disposition
In most BIL situations, your proceeds are zero because the company has failed or the loan won’t be repaid. That means your capital loss often equals your full ACB.
Step 4. Apply the “Allowable” Portion
Here’s where the “allowable” part of Allowable Business Investment Loss (ABIL) comes in.
Only 50% of your total Business Investment Loss is deductible as an ABIL, mirroring how capital gains and losses are treated in Canada.
ABIL = 50% × Business Investment Loss
Step 5. Consider Reductions and Adjustments
A few key adjustments may affect your final claimable amount:
- Recoveries. If you later recover funds from the business (for example, through liquidation proceeds), you must reduce your ABIL accordingly.
- Previous Deductions. If the investment was previously written down or deducted in another way, that portion can’t be claimed again.
- Change of Status. If the corporation no longer qualifies as a “small business corporation” at the time of loss, the BIL rules may not apply, and your loss might revert to an ordinary capital loss.
Step 6. Record and Report the Loss
Once the loss amount is finalized, it’s reported as a Business Investment Loss on your 5000-S3 – Schedule 3 – Capital Gains or Losses (for all), and the allowable 50% portion flows through to line 21700 of your return as an ABIL.
Because these calculations can quickly become complex, especially with partial repayments, reorganizations, or deemed dispositions, most investors choose to have a tax accountant specialist from the team at Faris CPA review the transaction before filing.
Claiming & Reporting an ABIL
Once you’ve determined that your loss qualifies as an Allowable Business Investment Loss (ABIL), the next step is to properly claim it on your tax return. The process is fairly structured, but it helps to understand where and how each part fits within your overall tax picture.
Step 1. Confirm the Loss Qualifies as a BIL
Before you can claim an ABIL, you first need to establish that your loss meets the definition of a Business Investment Loss (BIL) under the Income Tax Act. That means:
- The investment was in a small business corporation, either as shares or debt.
- The loss resulted from a disposition or a deemed worthless event during the year.
- The corporation was active in Canada and not primarily earning investment income.
If those boxes are checked, you’re ready to calculate your Allowable amount, which, as covered earlier, is 50% of the total loss.
Step 2. Report the Loss on Schedule 3
To claim your ABIL, you’ll need to complete Schedule 3 as mentioned.
Report the full Business Investment Loss (100% amount) in the appropriate section of Schedule 3.
The 50% allowable portion will automatically flow to line 21700 of your T1 General Return as your Allowable Business Investment Loss.
From there, the CRA system applies the ABIL against your other sources of income for the year, not just capital gains.
Step 3: Carry Forwards and Carry Backs
If your ABIL creates a non-capital loss (meaning it exceeds your total income for the year), you can:
- Carry it back up to 3 years, or
- Carry it forward up to 10 years.
After 10 years, any unused balance converts into a net capital loss, which can still offset capital gains indefinitely, but not other types of income.
Example Scenarios of ABIL Rules in Action
Example Scenario #1: Loss from Shares in a Small Business
Let’s say you invested $20,000 in shares of a small business corporation. A few years later, the company goes bankrupt, and your shares become worthless.
Total Business Investment Loss: $20,000
Allowable (50%) Portion: $10,000
You can deduct that $10,000 as an ABIL this year against employment or other income. If you can’t use it all, you can carry the unused portion back or forward under the non-capital loss rules.
Example Scenario #2: Unpaid Loan to a Small Business
Suppose you loaned $30,000 to a qualifying Canadian small business. The company closes and can’t repay the loan. You determine the debt is uncollectible.
Total Business Investment Loss: $30,000
Allowable (50%) Portion: $15,000
You record the full $30,000 on Schedule 3, and $15,000 becomes your ABIL on line 21700. If, a year later, you recover $5,000 from liquidation, you must adjust your previous ABIL to reflect the recovery.
Keep All the Documentation
The CRA may request evidence that your investment met the requirements for a BIL. Be prepared to provide:
- Proof of your original investment or loan,
- Records showing the corporation’s small business status,
- Evidence that the shares or debt became worthless (e.g., bankruptcy or dissolution documents).
Keeping clear records not only supports your claim but also simplifies future adjustments if recoveries or reorganizations occur.
Claiming an ABIL can make a major difference in recovering some of your loss, but accuracy is key. For most investors, it’s worth having a CPA review the calculations and documentation to ensure the claim stands up to CRA scrutiny.
Special Rules and Elections
The Income Tax Act contains several special rules and elections that can change when or how a BIL is recognized. These provisions often help investors claim a loss in the correct year, even if no formal sale or bankruptcy has happened yet. Understanding them can prevent missed deductions or timing errors.
Subsection 50(1) Election & Deemed Disposition of Worthless Shares or Debt
This is the most commonly used rule. It allows an investor to elect to treat shares or debt as if they were disposed of at the end of the tax year for no proceeds, even when no actual sale or repayment has taken place.
This election is especially useful when:
- A corporation is insolvent or no longer operating, but not yet legally dissolved.
- A debt to the corporation is clearly uncollectible, but hasn’t been formally written off.
By making the subsection 50(1) election, you’re essentially saying, “This investment has no remaining value. I’m electing to realize the loss now.”
To qualify:
- The shares or debt must be in a small business corporation.
- For shares, the company must have ceased operations and have no reasonable prospect of recovery.
- For debt, it must be established that repayment will not occur.
The election is made by attaching a signed letter to your return for the year, stating your intent under subsection 50(1) and identifying the investment.
Deemed Dispositions and Timing Considerations
If you don’t file a 50(1) election and the company is later dissolved, the loss is automatically realized in the year of dissolution. However, this can sometimes delay recognition by a full tax year or more.
For example:
- Without an election. The company closes in 2024 but isn’t legally dissolved until 2026. You can’t claim the loss until 2026.
- With an election. You file a 50(1) election for 2024, allowing you to recognize the loss immediately that year.
This timing can make a big difference if you have other income to offset or wish to carry back the loss to prior years.
Interaction with Fair Market Value and Recoveries
While the 50(1) election deems the investment disposed of for nil proceeds, you still have to monitor for recoveries. If you later receive money or shares during liquidation, those are treated as capital gains in the year received, since you already claimed a full loss earlier.
In some cases, you may also be able to make a fair market value election (for example, in corporate reorganizations) to adjust the cost base of remaining shares, but these scenarios typically require professional tax guidance to avoid double-counting or triggering unintended gains.
Allowable Business Investment Losses In General
This special tax treatment is a policy decision meant to favour those who invest in Canadian small businesses. However, it can be difficult for people who suffer a loss on the disposition of qualifying shares or debt to qualify for this special treatment by meeting the conditions in the statute.
If you think you may or will suffer a loss when disposing of shares of a small business corporation or debt owed by a CCPC, contact one of our tax professionals to ensure you meet the conditions for ABIL treatment where possible.
