Income Tax Act Subsection 3(d), 38(c), 39(1)(c), 40(2)(g)(ii), and 50

An allowable business investment loss (“ABIL”) is half of a capital loss, which was incurred on the sale of shares, or a debt of a small business corporation. The importance of receiving and ABIL rather than a capital loss is that an ABIL is deductible against any other source of income, not just capital gains.

Justice Bowman created a four-point test used to determine whether the loss is an ABIL.

  1. Did the taxpayer invest in shares or debt of a corporation?
  2. If the investment is debt, and not owed to a corporation with which the debtor corporation does not deal at arm’s length, has the debt been estab- lished to be bad as required under paragraph 50(1)(a)? If the investment is a share, has the share become worthless in the circumstances referred to in paragraph 50(1)(b), or has it been sold at a loss in an arm’s-length transaction?
  3. Was the property (share or debt) issued by a small business corporation as defined in part XVII of the Act?
  4. Was the property acquired by the taxpayer for the purpose of earning income as required under subparagraph 40(2)(g)(ii)?


CRA Resources

What is a business investment loss?

What happens when you have an ABIL?

Chart 6 – How to claim an ABIL

Guide T4037, Capital Gains

Form T1A, Request for Loss Carryback

Income Tax Folio S1-F5-C1, Related persons and dealing at arm’s length

IT232, Losses – Their deductibility in the loss year or in other years

IT484, Business investment losses


Case law

Coveley v Canada, 2014 FCA 281 – When is a Debt a “Bad Debt”?

Detailed Case law analysis may be found here: