Canadian Taxes A to Z (2018): "B" is for Business Investment Loss

Today, B is for Business Investment Loss. Two letters of the alphabet down, and 24 to go!

We all know that the key to tax happiness is maximizing your deductions, and minimizing your income. The more your deductions, the lower your income, and usually the lower your payable taxes will be. Generally speaking, business gains may eventually be taxable as income, and business losses may eventually be deductible to reduce income.

WHY BUSINESS LOSSES ARE MORE COMPLICATED THAN THEY SEEM

Unfortunately like lots of aspects of the Income Tax Act, things are a little more complicated than they should be when it comes to business losses. But that's why accountants and lawyers (and tax blogs) were put on earth to help you with your taxes.

A "business investment loss" (in the tax sense) can be used to reduce ALL sources of income (unlike other more limited capital losses), however it must relate to shares of a small business corporation (SBC) or a debt owed to the taxpayer by the small business corporation.

A SBC is defined by the Income Tax Act as a Canadian controlled private corporation using substantially all of its assets in an active business carried on in Canada. This type of claimable loss doesn't apply to public companies, companies not controlled by Canadian residents, or companies mostly operating abroad.

Fifty percent of the business investment loss can be used to reduce taxable income as an Allowable Business Investment Loss (ABIL). The loss is claimed on line 217 of a personal tax return.

HOW YOU CAN COMPLETELY WRITE OFF A LOSS & STILL OWN AN ASSET

Under s-s. 50(1) of the Income Tax Act you may be able to elect to have disposed of nil value shares or bad debts of a SBC and then have reacquired the shares or debt immediately after the end of the year for no cost. This could let you write off an investment, while still retaining ownership of the investment. Thus you could use a SBC later to start another business, while benefitting from the tax deductions now.

The CRA has a handy Interpretation Bulletin on Business Investment Losses called IT-484R2. Since there are quite a few hoops to jump through to benefit from this loss claim, I'd suggest you consult your friendly neighbourhood accountant about whether you're able to claim it.

Gordon S. Campbell is a tax lawyer practicing throughout Canada who has argued tax cases as high as the Supreme Court of Canada. Learn more at acmlawfirm.ca/taxlaw.