debt owed to the taxpayer by a small business
corporation
50% of the business investment loss can be used to reduce
taxable income, as an allowable business investment loss (ABIL),
which:
is treated
differently from allowable capital losses in that it can be
used to reduce all sources of income
is first deducted in the year it arises, and any
portion which cannot be deducted in this year
can be carried back 3 years and carried forward 10
years (7 years for ABIL arising in 2003 or earlier years) as a non-capital
loss
if unused after 10 years (7 years for ABIL arising
in 2003 or earlier years) can then be treated as a net
capital loss and carried forward indefinitely to be
deducted against taxable capital gains
A loss may not qualify as a business investment loss
under certain circumstances, such as when a capital
gains deduction has been claimed in prior years.
Worthless Shares or Debt
A taxpayer can elect under s. 50(1) to have disposed of
the above shares or debt for nil proceeds and to have
reacquired the shares or debt immediately after the
end of the year for nil cost if:
the SBC has become insolvent and the shares have a nil
fair market value, or
the debt of the SBC has been established to be a bad
debt
The advantage of this is that the taxpayer can
write off the investment while still retaining ownership.
The investment may be worth something in the future. If the loss is from
debt owed to the taxpayer by the corporation, the taxpayer may use the
corporation for starting another business in the future, at which time the debt
could be recovered, because it would still be recorded on the books of the
corporation. Any recovery of amounts previously deducted would have to be
included in income.
The allowable business investment loss is claimed on line 21700
of the personal income tax return.
There are many factors to be considered when selling a
business, to determine the best disposition method. Professional advice
can be very valuable in this regard.