Tax Tip Regarding Business Investment Losses...
Allowable Business Investment Loss
As a tax accountant, I get to enjoy conversations with people in which they’ll be completely honest with me. About money, at least… This makes me feel valued and honored – and that is itself one of the reasons I’ve always loved my job. The fact that I get to help people is of course the ultimate reward. A huge step in getting to do so, though, is learning about what has gone wrong for them financially, rather than what has gone right…
A friend who didn’t understand my job once said to me something along the lines of: “You’ve sold your soul to the devil! You just help rich people hide and keep more of their money, so the poorer among us have to pay more taxes!”
This really couldn’t be further from the truth – and certainly is not what drives me to go to work every day and deal with my clients. As an accountant serving many small businesses and sole proprietors, I get to work with them through profitable times and, well, not so profitable times… I see that many of them are, like me, doing what they love and working for themselves because of their passion for it. During the lifespans of my customers’ careers, companies and endeavours, there are invariably times when their businesses and their investments work very well for them, and times when they don’t. The thing is, they often wouldn’t survive and have the chance to do well if we weren’t helping them pay the right amount of tax – maximising their gains during good times and minimising losses during bad times. It is my firm belief, therefore, that by helping brave investors and business owners be as successful as possible, I, my staff and my peers in this industry do a great service to our community and our economy.
Now, given the slightly shaky economic climate in our province this past year, there are no doubt a higher than usual proportion of investments and business endeavours that simply haven’t worked out. I am compelled, therefore, to write this article in the hope it will help give guidance to some people who have suffered losses of late.
If you make investments or guarantees with your own money, or if you invest money in other people’s businesses, or if you use your own money within a company you run – there’s a chance that circumstances will one day conspire to make financial moves or investments not work out and you might lose. This is simply the nature of business. Very few people manage to make nothing but successful decisions and investments in their lives. Some things are simply beyond our control. Sometimes we lose. When these unfortunate losses occur, you should know the rules regarding what can and cannot be deducted from taxable income.
One thing that has, on occasion, given me cause for concern, is that quite a lot of people don’t know that business investments don’t have to just be a straight gamble with their own cash (after tax). Some just seem to write bad investments off and don’t want to think about them again. This is a huge oversight, tax-wise. Most investments carry risk, to a certain extent. And that risk cannot be removed completely. However, some of that risk can be mitigated, to an extent: Losses do effect tax liability going forward. An investment made in business, if it has failed so money is lost, can often (in part at least) be deducted from other income.
Below I’ll try to explain a little more regarding what type of losses can be considered “allowable” and are therefore worth declaring on your tax return. We’ll also look at when that can be done, how much is eligible etc.
If you had a business investment loss in 2014 – or before for that matter, you may be able deduct some of that loss from taxable income.
Many “Business Investment Losses”, as they are called, can be taken into account by the CRA, and a portion of the loss (50%) can be deducted from taxable income – from all sources of income for the year.
For a loss that qualifies, half of that amount can be deducted and is called an Allowable Business Investment Loss (ABIL). If an ABIL cannot be deducted in the year it arises, it is treated as a non-capital loss that can be carried back three years and forward ten years against taxable income. If unused after ten years, an ABIL becomes a capital loss. The rules are slightly different for losses arising in 2003 or prior years could be carried back three years and forward seven years as non-capital, therefore a loss that a person suffered in 2003, if unclaimed, became a capital loss in 2010.
An ABIL results from the actual or deemed disposition of either a share of small business corporation, or a debt owed to you by a Small Business Corporation. To qualify as such, the corporation must be a Canadian controlled private corporation that uses 90% or more of its assets in operating an active business in Canada; and you need to be deemed to have disposed of (for nil proceeds of disposition), a debt or a share of a small business corporation under any of the following circumstances:
- A small business corporation owes you a debt (other than a debt from the sale of personal-use property) that is considered to be a bad debt at the end of the year.
- At the end of the year, you own a share (other than a share you received as consideration from the sale of personal-use property) of a small business corporation that: has gone bankrupt in the year; is insolvent, and a winding-up order has been made in the year under the Winding-up Act; or is insolvent at the end of the year and neither the corporation, nor a corporation it controls, carries on business. Also, at that time, the share in the corporation has a fair market value of nil, and it is reasonable to expect that the corporation will be dissolved or wound up and will not start to carry on business (there are rules regarding this that can be found on the CRA website, or explained by an experienced, qualified tax accountant).
A few, fairly common situations in which half a person’s loss might be deemed to be ABIL are:
- A failed/lost investment in shares or loans to a Small Business Corporation: If an investment was made either through acquiring shares or debt of the financed corporation and the business failed and cannot repay the loan, the taxpayer may be eligible to make a claim;
- Loan guarantees on behalf of a small business corporation: The relevant tax laws deem amounts honored under the guarantee as amounts owing by a Small Business Corporation to the guarantor. This can qualify as ABIL, therefore, when the corporation received a loan that was personally guaranteed by a taxpayer, and the creditors executed the guarantee due to the inability of the corporation to repay the loan either in part or in full. The amount of unpaid guarantees may be considered eligible.
- Liabilities, on behalf of a corporation, for payroll withholdings and/or GST: A loss might qualify for ABIL (and therefore half of it deducted from other income) in a situation where the CRA considers the directors of a corporation liable, and they are forced to pay the amount (without reimbursement from the corporation).
The rules aren’t simple, but the bottom line is this: If you have suffered some sort of business investment loss, ask an accountant for advice and make sure you take advantage of these rules as well as you can – you don’t have to lose everything you invest as post-tax dollars, and the savings can be sizable.
Information from the CRA regarding Allowable Business Investment Loss is available on their website here.
If you want to speak to a qualified accountant about this or any other issue, feel free to contact Chrysalis and ask for advice.