My client lost money on shares of a small business corporation. How does the allowable business investment loss work?
For 2026, an allowable business investment loss is one half of a loss on shares or debt of a small business corporation, deductible on line 21700 against any income. It needs a sale to an arm's length person or a section 50 deemed disposition. Unused, it carries back 3 years, forward 10, then becomes a net capital loss.
Which losses qualify as a business investment loss?
A business investment loss is a capital loss on a share of a small business corporation, or on a debt owed to your client by a Canadian controlled private corporation that is a small business corporation, under paragraph 39(1)(c) laws-lois.justice.gc.ca. Paragraph 38(c) makes one half of it the allowable business investment loss
laws-lois.justice.gc.ca. The disposition has to be to an arm's length person, or a deemed disposition under subsection 50(1).
| Situation | Qualifies? | Rule |
|---|---|---|
| Your client sells shares of a small business corporation to an arm's length buyer at a loss | Yes | 39(1)(c)(ii) |
| Your client sells the same shares to a spouse or their own holding company | No | Not arm's length and not a 50(1) disposition |
| The corporation went bankrupt in the year and your client elects | Yes, nil proceeds at year end | 50(1)(b)(i) |
| The corporation is insolvent, carries on no business, the shares are worth nil and it is expected to be wound up | Yes, if your client elects | 50(1)(b)(iii) |
| A loan to the corporation becomes a bad debt, and it was made to earn income | Yes, if your client elects | 50(1)(a), 40(2)(g)(ii) |
| Your client pays on a guarantee of the corporation's debt | Can qualify, treated as a debt owed by the corporation | 39(12) |
| A corporation's loss on debt of a CCPC it does not deal with at arm's length | Never | 39(1)(c)(iv) |
| Shares of a public company | No | Not a CCPC, so not a small business corporation |
A small business corporation is a CCPC with 90% or more of the fair market value of its assets used in an active business carried on mainly in Canada, or in shares or debt of connected small business corporations. It only has to meet that test at any time in the 12 months before the disposition canada.ca. That lookback matters when the company sold or lost its active assets in the months before it failed.
How a past capital gains deduction shrinks the loss
If your client ever claimed the capital gains deduction, subsection 39(9) cuts the business investment loss by the lesser of the loss and the prior deductions grossed up by the reciprocal of the inclusion rate, which is 2 for deductions claimed in 2001 and later years laws-lois.justice.gc.ca. The part that is cut doesn't vanish: it remains an ordinary capital loss, usable only against capital gains
canada.ca.
Worked example. In 2026 your client's small business corporation goes bankrupt. The shares cost $100,000. Back in 2018 your client claimed a $15,000 capital gains deduction on an unrelated gain. Their other 2026 income is $25,000 and they have no 2026 capital gains.
| Step | Amount |
|---|---|
| Capital loss on the shares (nil proceeds under the 50(1) election) | $100,000 |
| 39(9) reduction (2 × $15,000) | $30,000 |
| Business investment loss (line 21699) | $70,000 |
| ABIL at one half (line 21700) | $35,000 |
| ABIL used against other 2026 income | $25,000 |
| Unused ABIL, added to the non capital loss | $10,000 |
| Reduced part kept as a capital loss (line 17800 of Schedule 3) | $30,000 |
| Allowable capital loss from that part, carried forward | $15,000 |
The $10,000 can go back to 2023, 2024 or 2025 on Form T1A canada.ca, or forward to 2036. The $15,000 joins your client's net capital losses and waits for a taxable capital gain. The T1436 Capital Gains Worksheet has the line 21700 chart that produces the reduction and the line 17800 figure
canada.ca.
What happens to an ABIL your client cannot use this year?
The unused ABIL becomes part of your client's non capital loss. It doesn't get the normal 20 year carryforward: an ABIL carries back 3 years and forward 10 years, and any amount still unused after 10 tax years becomes a net capital loss in the eleventh year canada.ca. Subsection 111(8) does this by dropping the ABIL out of the non capital loss after the tenth year and adding it to the net capital loss through variable C
laws-lois.justice.gc.ca.
| Period, for a 2026 ABIL | How the unused part can be used |
|---|---|
| 2023 to 2025 | Carried back as a non capital loss, against any income (Form T1A) |
| 2026 | Deducted against any income on line 21700 |
| 2027 to 2036 | Carried forward as a non capital loss, against any income (line 25200) |
| 2037 onward | Net capital loss, only against taxable capital gains (line 25300), no time limit |
Losses from years ending before March 23, 2004 had a 7 year carryforward instead of 10 canada.ca. Check the origin year before you apply an old balance. For the general non capital loss rules, see non capital loss carryover and net capital loss carryover.
How an ABIL cuts the lifetime capital gains exemption later
The reduction runs in both directions. Any ABIL your client claims reduces the capital gains deduction they can claim that year and in future years canada.ca. The mechanism is the annual gains limit in subsection 110.6(1), which subtracts all of the individual's ABILs for the year
laws-lois.justice.gc.ca.
So a client who plans to sell qualified small business corporation shares later pays for today's ABIL with exemption room. When the loss comes from a deemed disposition, subsection 50(1) applies only if your client elects laws-lois.justice.gc.ca, so weigh the ABIL against the exemption they expect to use on a future sale before you file the election. The cumulative gains limit is also reduced by any cumulative net investment loss (CNIL) at year end
laws-lois.justice.gc.ca, a separate brake covered in lifetime capital gains exemption 2026.
What must your client file to claim an ABIL?
For a deemed disposition, your client has to elect: attach a signed letter to the return saying they want subsection 50(1) of the Income Tax Act to apply canada.ca. Without the election there is no disposition, so no loss for the year.
CRA asks for a note with the claim listing the corporation's name, the number and class of shares or type of debt, the insolvency, bankruptcy or winding up date, the acquisition date, the proceeds, the adjusted cost base, the outlays and expenses, and the amount of the loss canada.ca. The gross loss goes on line 21699 and the ABIL on line 21700.
Watch the restart rule. If the shares were deemed disposed of because the company was insolvent and inactive, and it or a corporation it controls carries on business within 24 months, subsection 50(1.1) deems your client (or a non arm's length owner) to dispose of the shares at their old adjusted cost base, which reverses the loss as a capital gain laws-lois.justice.gc.ca.
Sources
Does a loan my client made to their own company qualify?
Yes, an individual's loan to their own CCPC can qualify. A bad debt under subsection 50(1) needs no arm's length buyer, and the exclusion for debt of a non arm's length CCPC applies only to corporate lenders laws-lois.justice.gc.ca. The loan must have been made to earn income: a shareholder's loan to the corporation generally has that connection, while a loan from someone who is not a direct shareholder is harder to support
canada.ca. The debt must also be a bad debt under subsection 50(1) with the election filed.
Can a corporation claim an ABIL?
Yes, but not on debt owed by a CCPC it does not deal with at arm's length. A corporation's loss on that kind of debt can never be a business investment loss canada.ca, so a holding company's loan to its own operating company falls outside the rule.
Is the ABIL still one half in 2026?
Yes. Paragraph 38(c) still sets the ABIL at one half of the business investment loss as of October 2026, because the proposed two thirds inclusion rate was cancelled laws-lois.justice.gc.ca. See capital gains inclusion rate 2026.
What happens if the shares were sold to a relative at a loss?
It isn't a business investment loss. A sale to a person your client does not deal with at arm's length fails paragraph 39(1)(c) laws-lois.justice.gc.ca, so at best the loss is an ordinary capital loss that only offsets capital gains. Check the stop loss rules before you count on even that.
General information for the tax year shown, not advice for a specific client. Confirm the facts before you file or remit.