Q: Several years ago, my brother and I invested into a bakery machinery business. For many years, the business was successful, however due to the U.S. dollar and overseas competition, sales began to decline. Last year, we were unable to secure financing and had to close our door. I was advised the losses cannot be applied on my personal tax because the corporation incurred these losses. I believe this is a capital loss and I should be allowed to deduct these losses against the gains of some bank stocks I liquidated in December 2007. My portion of the investment is approximately $150,000.
A: Owning your own business can be very satisfying but comes with the unknown risk. Risk cannot be eliminated but learning to manage risk is an important tool for any business owner.
Many Canadian manufacturers are bleeding red ink because of the high dollar. Unfortunately, some have not survived and declared bankruptcy; others are hanging on by a thread.
There is a definite distinction between an individual and a corporation. For tax purposes, income/losses in a corporation reside with the corporation and the individual does not have to report the activity of the corporation.
An unincorporated business (sole proprietorship, partnership) and the individual are treated as one and the same for tax purposes. Therefore, an individual must report income/losses from the business on their personal tax return. Profit is taxed at their rate and losses can be used to reduce other forms of income.
However, all is not lost. You may qualify to claim an Allowable Business Investment Loss (ABIL) if you can establish the amount you invested was a loan owing to you by the corporation and this amount is not recoverable. A qualified corporation must be a Canadian Controlled Private Corporation (CCPC) and a qualified Small Business Corporation (SBC). Although, you cannot recover the loss of your investment, one-half may be deductible on your personal tax return.
Capital losses can be applied to reduce capital gains. Unlike a capital loss, which can only be applied against capital gains, an ABIL reduces other income such as business and employment income.
Due to the complexities, nature and large amounts of these transactions, you should seek competent help. Check with an accountant who is familiar with ABILs. In the event the CRA wants to do an audit make sure you keep good records.
Henry Choo Chong, CGA provides professional accounting and taxation solutions for individuals, businesses and corporations. Henry can be reached at 416-590-1728, ext. 304. E-mail all questions to Money Matters: firstname.lastname@example.org.