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Allowable Business Investment Losses And The Capital Dividend Account

Subject: ABIL's, CDA Number: 10-19 Date: 7/30/2010

An ABIL claimed by a corporation reduces the corporation’s CDA

The recent unfavourable economic conditions have resulted in many taxpayers incurring business investment losses. For tax purposes, a “business investment loss” is a capital loss from a disposition to a person whom the taxpayer was dealing at arm’s length (or a deemed disposition where a certain designation is filed), of one of the following:

1. a share of the capital stock of a small business corporation (this loss can be claimed by individuals or corporations); or
2. debt owing to an individual by a small business corporation; or
3. debt owing to a corporation by a small business corporation, unless it is inter-corporate non-arm’s length debt.

A “small business corporation” does not actually have to be small. For business investment loss purposes, it is a Canadian-controlled private corporation substantially all of whose assets were used in an active business carried on primarily in Canada (or were shares or debt of other small business corporations) at any time in the 12 months prior to the disposition.

(The above descriptions are somewhat simplified.)

Half of a business investment loss is deductible as an “allowable business investment loss” (ABIL). Unlike a regular capital loss, an ABIL can be applied against any type of income (such as employment or investment income), not just taxable capital gains.

Even though an ABIL can be applied against any type of income, it is a net capital loss for purposes of computing the capital dividend account (CDA). This means that an ABIL claimed by a corporation reduces the corporation’s CDA. The CDA, which is the “untaxed half” of a corporation’s net capital gains plus certain other amounts, represents tax-free money that a shareholder can take out of a company. This reduction to the CDA arising from an ABIL claim is often overlooked.

Where a corporation is planning to claim an ABIL, it is important to consider the impact on the CDA. In some cases, paying out capital dividends before the ABIL is realized can result in significant tax savings.

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