It’s hard to lose money on a business investment. Fortunately, a special tax rule in Canada can help ease the pain of that financial setback. The Allowable Business Investment Loss (ABIL) rule was made just for people in this situation. This guide will show you how to use that loss to lower your overall tax bill in a way that most other investment losses don’t.
What Is an Allowable Business Investment Loss (ABIL)?
An ABIL is a type of capital loss that happens when you lose money by investing in a small Canadian business. A regular capital loss can only be used to lower your taxes on capital gains, but this one is different.
The ABIL is much more flexible. With an ABIL, 50% of the money you lost can be used to lower your taxes on any kind of income. This includes your job income, business income, or capital gains. It’s a very powerful way to reduce your overall tax bill.
The government created the ABIL to encourage people to invest in small Canadian companies. It recognizes the high risk that comes with supporting a new business or start-up.
What Investments Qualify for an ABIL?
To claim an ABIL, your loss must come from a very specific kind of investment. Not just any loss will count, so it’s important to know the rules.
Shares in a Small Business Corporation (SBC)
The company you invested in must be what’s called a Canadian-controlled private corporation (CCPC). When you invested, almost all of its assets (around 90%) had to be used for running an active business located in Canada. This rule makes sure the tax break supports real Canadian businesses.
Debt Owed to You by an SBC
You might also be able to claim an ABIL if you loaned money to a small business corporation and it can’t pay you back. If the business fails and your loan becomes a bad debt, you could claim that loss.
The first step is to figure out whether you qualify for this. It’s often a good idea to conduct a complete review of the tax consequences to get a full picture of your finances.
How to Calculate and Claim Your ABIL
Once you know your investment is eligible, it’s easy to figure out how much it is. First, you find your “adjusted cost base,” which is just a fancy way of saying the total amount you paid for the shares or the loan you gave.
Next, you subtract any money you got back, either from selling the shares or from the debt being partially repaid. What’s left is your business investment loss.
Business Investment Loss = What You Paid – What You Got Back
ABIL = 50% of your Business Investment Loss
You need to claim the ABIL in the same year the loss happened. You do this by filling out the right parts of your tax return, mainly Schedule 3, “Capital Gains (or Losses).” You will also need to submit the proper tax information forms with all the details.
Keep very clear records of everything you do. This includes proof that you invested, proof that the company was a small business corporation, and information about the loss.
What if You Can’t Use the Full ABIL in One Year?
Sometimes, your ABIL might exceed your total income for the year. If that happens, don’t worry because you don’t lose out on the deduction. Here’s what happens:
To work things out, you can get help from professionals like Phoenix Knight, who can make this process much easier.
Conclusion: Turning a Loss into a Tax Advantage
Nobody wants an investment to fail, but it’s a part of doing business. The Allowable Business Investment Loss is a very helpful tool in Canada’s tax system that helps reduce that risk.
You can turn a loss into a tax break that lowers your total bill if you know how it works and claim it the right way. It’s always a good idea to talk to a professional if you’ve lost money on a business investment or want to plan your future investments wisely.
