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What is an ABIL?
This article will be the first in a series of articles discussing the allowable business investment loss (“ABIL“), including the interpretation of key terms as well as a discussion of recent case law.
Where a ratepayer’s adjusted cost base (“ACB“) of a debt to a creditor or shares of a corporation exceeds the fair market value of the debt or share, upon disposition of the debt or shares, a capital loss may be If a capital loss is available, the taxpayer may be able to claim an ABIL.
An ABIL claim is equal to 50% of the taxpayer’s business investment loss. Generally, any unapplied portion of an ABIL becomes a non-capital loss that can be carried back 3 years and forward 10 years.
With the threat of a looming recession and rising interest rates, capital losses could become more frequent. It is important to note that an ABIL claim may be verified by the Canada Revenue Agency (“BOW“). Therefore, it is important to understand the requirements of an ABIL claim.
Why an ABIL claim?
An ABIL is a type of capital loss with different tax treatment than a typical capital loss. More generous tax treatments are granted to an ABIL in order to induce investors to invest in small businesses (“CCSUnlike most capital losses, which can only be used to reduce taxable capital gains, an ABIL allows the loss to be deductible against all sources of income.
When can you claim ABIL?
An ABIL can be claimed in the following scenarios:
1. Actual layout
An ABIL may be claimed where there is a capital loss arising from an actual disposition to an arm’s length person of a share of the capital stock of an SBC.
An ABIL may also be claimed where there is an arm’s length disposition of a debt owed to a taxpayer by a Canadian-controlled private corporation (“CPCC“). According to subparagraph 39(1)(c)(iv) of the income tax law (Canada) (the “Law“), in the case of a debt, the debtor CCPC must be: (1) an SBC; (2) bankrupt at the time it was an SBC; or (3) an insolvent company that was an SBC at the time of liquidation – the order has been placed.
2. Deemed disposition
An ABIL may also be claimed where a taxpayer elects on their tax return to have subsection 50(1) of the Act apply to that taxation year such that the taxpayer is deemed to have disposed of the share or debt at the end of a taxation year for zero proceeds and reacquiring it immediately after the end of the year at zero cost.
In the case of a debt, the taxpayer must have established that it became a bad debt during that tax year and the debt must be due to the taxpayer at the end of that tax year.
In the case of a share in a company, the company must have: (1) become bankrupt; (2) becomes insolvent, or a winding-up order has been made during the year or (3) at the end of the year, the company is insolvent, neither the company nor a company controlled by it operates a company, the fair market value of the stock is nil and it is reasonable to expect that the company will be dissolved or liquidated and will not begin to carry on business.
Recent case law
As mentioned above, whether a provision was “arm’s length” can be a key determining factor in the ability to claim an ABIL. Although a full discussion of the meaning of independence is beyond the scope of this article, the recent case of Keybrand Foods Inc. v. Canada2020 CIF 201 (“key mark“) examined the meaning of independence in the context of a CAPA.
Keybrand Foods Inc. v. Canada
In key markthe Federal Court of Appeal (“CIF“) dealt with the third element of the test for determining factual non-arm’s length, as set out in Canada v McLarty2008 SCC 26:
- was there a common spirit driving the negotiation for both parties to a transaction;
- whether the parties to a transaction acted in concert without separate interests; and
- was here de facto control
In key tag, the taxpayer, Keybrand Foods Inc. (“Brand foods“) invested in Vidabode Group Inc. (“VidabodeIn 2010, Vidabode borrowed about $15 million from GE Capital and that loan went into default. Keybrand Foods, together with another related company, guaranteed Vidabode’s debt to GE Capital. Keybrand Foods borrowed about $14 million. millions of dollars to a lender and used the money to subscribe for shares of Vidabode Vidabode used the money from Keybrand Foods to repay the debt to GE Capital Subsequently, Keybrand Foods attempted to claim ABIL on the Vidabode shares.
The CRA dismissed ABIL’s claim on the grounds that Keybrand Foods and Vidabode were dealing at arm’s length at the time the shares in question were acquired from the Treasury. The parties have agreed that at the time the shares of Vidabode were subscribed for, the fair market value of the shares was nil. Following the finding that Keybrand Foods and Vidabode were dealing at arm’s length, Section 69 of the Act applied and the ACB of the shares was deemed to be the fair market value (nil) and not the amount paid . If the ACB is nil, on the subsequent disposition of the shares (deemed or actual), there is no capital loss (and therefore no ABIL). Keybrand Foods was unsuccessful in the Tax Court and appealed. The FCA dismissed the appeal and declared that Keybrand Foods was the directing mind and therefore had de facto control, making the parties arm’s length.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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