Losses

When you invest your money in any asset for investment purposes, the main goal is to make money from that investment; however, things don’t always turn out as planned. Sometimes, there comes a time when you have to bite the bullet, take the loss and move on. While losses can be painful experiences, there is an opportunity to make the government share the pain by reducing your tax bill; however, not all losses are created equal.

Capital Losses

When you invest in stocks, bonds or mutual funds in a non-registered account and you sell them at a loss, it triggers a capital loss for tax purposes. You can use this capital loss to offset any capital gains you realize in the same year, the three preceding years, or you can carry it forward to use against future capital gains. The key point here is that capital losses can only be used to offset capital gains.

Useless Losses

When you invest in stocks, bonds or mutual funds in a registered account such as an RRSP, RRIF or TFSA, the loss is not deductibe against present, past or future capital gains. Similarly, if you buy a house or condo to live in and you lose money when you sell it, this loss is also not tax-deductible.

Allowable Business Investment Loss (ABIL)

If you do have the unfortunate experience of a loss, from a tax perspective, an ABIL is the best kind of loss. Unlike capital losses which can only be used to offset capital gains, ABILs can be used to offset any kind of income such as salary, interest, pension income and, of course, capital gains.

Helpful Tips

If you are approached by family or friends about investing in a private company, please approach these offers with extreme caution. The reason we recommend extreme caution is two-fold:

• You are not in control of the company and are relying
  solely on the business acumen of others to sucessfully
  run that business.
• Since it is a private company, it will be very difficult, if
  not impossible to sell your shares or debt owing to a third
  party since they are not publicly traded. This means it is
  very difficult to get your money back and this is referred
  to as liquidity risk.

If you do decide to invest, please ensure it will at least qualify as an ABIL in the event the shares or debt owing do become worthless. In this way, you could at least get some tax relief.

If you lend money to a private business, you should insist on a formal loan agreement, complete with collateral (if possible), a stated interest rate, and specified repayment terms.

Whether you buy shares or lend money, have your accountant review the books of the private business first to see if it does, in fact, qualify as a small business corporation.

If you wish to invest your own corporate money into another business, please be aware that it will not qualify as an ABIL unless it is an arm’s length transaction, e.g. investing in another family member’s business will not qualify.

Please also note the Canada Revenue Agency almost always does some sort of review or audit of ABIL claims.