20 What is a business investment loss? What is the impact on Taxable Income? Why does it exist?
Bhanvi Ghai
A Business Investment Loss (“BIL”) arises when you invest in certain types of small businesses in Canada (either through buying shares or providing loans) and lose your investment. The BIL is more flexible than a normal capital loss and provides a tax incentive for people to invest in small businesses in Canada.
Just as an Allowable Capital Loss represents the deductible 50% portion of a Capital Loss, an Allowable Business Investment Loss (“ABIL”) represents the deductible 50% portion of a BIL. When calculating net income for tax purposes, ABIL’s are deducted in 3(d) in the year they occur. Any unused portion of the ABIL becomes a Non-Capital Loss which can be applied against all sources of income and carried back 3 years and forward 10 years.
If the ABIL cannot be deducted within 10 years, then it becomes a Net–Capital Loss that can be carried on indefinitely and can only be claimed against Taxable Capital Gains.
For example: If you purchase $20,000 shares in a public corporation and the corporation goes bankrupt, this would create a $20,000 Capital Loss. 50% of this amount ($10,000) would be your Allowable Capital Loss and could only be applied against Taxable Capital Gains.
The same investment with an eligible small Canadian corporation would create a $20,000 BIL. 50% of this amount ($10,000) would be your ABIL and could be applied in 3(d) against ALL sources of income. As mentioned earlier, any unused amount would initially be added to your non-capital loss balance.
This whole concept exists so that if a taxpayer loses money on this type of investment, they are rewarded with a much more flexible type of loss. This special tax treatment encourages people to invest more in Canadian small businesses.
Interactive content (Author: Lam Lewis, January 2020)
Interactive content (Author: Jasneet Kakkar, January 2020)
References and Resources:
- Article – “Lines 21699 and 21700 – Business investment loss” (Author: Government of Canada)
- S4-F8-C1 Income tax folio
January 2020
