ABIL in Canada: Tax Benefits 

In Canada, the tax system generally taxes net income, which means expenses are deducted from revenues. This is true for both employee and business or property income. Deductible expenses for employees are categorized and conditional, while for business and property income, any operational expense is deductible if it’s incurred for income generation, is reasonable, and not specifically disallowed. This system allows for the deduction of losses, which can be more than the revenue, and these losses can be carried back and forward within certain limits, helping to balance the tax burden over years. 

The Income Tax Act provides a more favorable tax loss treatment for certain small business investments. Normally, investments are considered capital property, and losses on them are capital losses. Capital losses are only half deductible and can only be offset against taxable capital gains. However, a Business Investment Loss under specific conditions is treated more favorably. Half of such a loss, known as the Allowable Business Investment Loss (ABIL), can be deducted from any income type, including employment, business, property, or capital gains. 

To qualify for ABIL, the taxpayer must dispose of property to a person they deal with at arm’s length, excluding immediate family and persons with a common economic interest with the taxpayer. The property in question must be either a share of a small business corporation or debt owed by a Canadian-controlled private corporation (CCPC) that is a small business corporation. While an ABIL is a capital loss, it can be applied against any other income source. 

There are restrictions to this special treatment. Like other losses, ABIL can be carried back for three years to recover taxes paid in those years if it can’t be used in the current year. However, unlike non-capital losses (carried forward for 20 years) and capital losses (carried forward indefinitely), ABIL can only be carried forward for 10 years. If not used within this period, the loss is forfeited. 

This favorable tax treatment is a policy decision to encourage investment in Canadian small businesses. However, qualifying for this treatment by meeting the statutory conditions can be challenging. If you anticipate a loss from disposing of shares of a small business corporation or debt owed by a CCPC, it’s advisable to consult a tax professional to ensure you meet the conditions for ABIL treatment.