What Is It?
An Allowable Business Investment Loss (ABIL) is a special type of capital loss that provides more favorable tax treatment than an ordinary capital loss. Unlike a regular capital loss — which can only be applied against capital gains — an ABIL can be deducted against any source of income (employment, business, rental, etc.), making it far more useful when you have limited capital gains to offset.
This loophole applies to taxpayers who invested in shares of or made loans to a qualifying small business corporation that has failed.
How It Works
A Business Investment Loss (BIL) arises when:
- You dispose of shares or a debt obligation of a small business corporation (SBC) for proceeds less than the adjusted cost base, or
- A debt owed to you by an SBC becomes a bad debt — the company is insolvent, bankrupt, or has been wound up
The Allowable Business Investment Loss = 50% of the BIL (the same inclusion rate that applies to other capital losses).
The ABIL can be deducted against any income in the current year. Any unused ABIL that cannot be absorbed in the current year can be:
- Carried back 3 years (applied against income in those prior years)
- Carried forward 10 years as a net capital loss (if still unused)
Do I Qualify?
To claim an ABIL, you must meet these conditions:
- The corporation was a small business corporation (SBC) — a Canadian-controlled private corporation (CCPC) that uses substantially all (90%+) of its assets in an active business carried on primarily in Canada
- You held shares OR were owed a debt by the corporation
- The shares were disposed of (sold, deemed disposed, became worthless) or the debt became a bad debt (company bankrupt or insolvent)
- The company was an SBC at the time of the investment or at some point in the prior 12 months
- The loss is a genuine economic loss — not a paper loss on a related-party transaction
Calculating Your ABIL
Example: You loaned $80,000 to a startup that went bankrupt with no recovery.
- Business Investment Loss: $80,000
- Allowable Business Investment Loss (50%): $40,000
- This $40,000 is deductible against any income (salary, rental, etc.)
- If your total income is only $30,000, the remaining $10,000 carries back or forward
What Most People Don’t Know
- Ordinary capital losses can’t do this. A regular capital loss on public company shares or personal investment property can only offset capital gains. An ABIL can offset your salary. This distinction is critical for investors who lose money on private company investments.
- Loans qualify, not just shares. Many investors focus on share losses, but a bad debt from a loan to a small business corporation also qualifies as a BIL — as long as it was a legitimate arm’s-length or carefully documented related-party loan.
- The SBC test applies at time of investment AND at time of loss. If the company was an SBC when you invested but had diversified into non-business assets before failure, you may not qualify. Keep records of the company’s asset composition throughout the investment.
- ABIL clawback if loss is eventually recovered. If you later recover amounts you claimed as an ABIL, a “recapture” provision may apply, requiring you to include the recovered amount in income.
Frequently Asked Questions
The company I invested in isn’t officially bankrupt — it just stopped operating. Can I still claim an ABIL?
Possibly. You can claim an ABIL if the shares or debt have become “worthless” — the corporation is insolvent and has no reasonable prospect of recovery. You may need to document the company’s financial situation (negative net worth, no active business, unresponsive management). The CRA may challenge the timing of the claim.
I invested in a family member’s corporation. Does that affect my ABIL claim?
Non-arm’s-length loans require careful documentation. The debt must have been made for the purpose of earning income (not as a gift), and the interest terms should have been commercially reasonable. The CRA scrutinizes related-party ABIL claims; ensure you have a written loan agreement and evidence the loan was genuine.
Can I claim an ABIL on a company incorporated outside Canada?
No. The corporation must be a Canadian-controlled private corporation. Foreign corporations do not qualify. However, a Canadian holding company that invested in a foreign subsidiary may, in some circumstances, have its own ABIL on the failed Canadian investment.
My ABIL was larger than my income — what happens to the unused amount?
The portion that cannot be absorbed in the current year converts to a net capital loss that can be carried forward up to 10 years (or back 3 years). However, the carried-forward portion can only offset capital gains — it loses the “any income” deductibility advantage. Consider the timing of your claim carefully if you anticipate future capital gains.