Writing off Loans Made to a Business
If at the end of a year you are owed a loan amount that is no longer collectible, you might be able to realize a capital loss on that loan. Only 50% of a capital loss is allowable and is subject to certain limitations that can result in the loss being suspended (available later) or deemed to be zero. A capital loss can only be used to offset capital gains realized in the year, in the prior three years or at any point in the future.
The capital loss on a loan determined to be a bad debt is calculated as a disposition of the loan for zero proceeds. For the capital loss to be permitted for income tax purposes, the loan must have been made for the purpose of earning income from a business or property, or received as consideration for the disposition of capital property to a person with whom you were dealing at arm’s length. The loan must have been established by you to have become a bad debt (uncollectable) in the year. As well, an election needs to be filed with your tax return for that year advising the Canada Revenue Agency (CRA) of the capital loss.
The election to report a loan as a bad debt and a capital loss on a tax return is simply a letter to the CRA providing details of the loan determined to have become a bad debt in the year. The letter should include information about the loan, the amount, date advanced, the borrower, the purpose of the loan, and how you determined the loan is a bad debt. If you e-file your tax return you need to mail the letter to the CRA before the filing due date of your tax return. Because the failure to file the election with the CRA can result in the CRA denying the capital loss, you might consider sending the letter by registered mail.
If the loan determined to be a bad debt in the year was to an arm’s length Canadian-controlled private corporation (CCPC) engaged in an “active business” at some point in the twelve months prior to becoming a bad debt, the loss may qualify as an “allowable business investment loss” (ABIL). An ABIL is a capital loss, half of which is deductible against income from other sources of taxable income. The CRA will review all ABIL claims so you need to have evidence of the amount of the loan, proof the company to which you lent the funds was a CCPC engaged in “active business” in the twelve months prior to becoming a bad debt, support the loan was made to earn income from business or property and the nature of the loss triggering event in the year.
Contact a Chartered Professional Accountant to see whether you might be able to write off a loan, and whether the resulting loss might qualify as an allowable business investment loss.
Comments
Paul
June 27, 2022A question for you, if I may: Can a business write off a loan receivable that is not collectible if it is made to a related person, and not part of the Company's ordinary business? - the money was just lent to the person out of Company revenues, for the person to cover his expenses. Thanks very much, Paul.
Eugene Braila
August 16, 2022If the loan was made to an arms length party and the loan becomes uncollectable, the business can write off this loan, but the forgiven loan is a taxable income for the other party.
Russ
September 27, 2022I have a question if you don’t mind. I am inquiring about whether or not a shareholder can benefit from writing off debt that they have given the company. The situation is the shareholder lent money to his company to start up the business, unfortunately the business did not go well so the owner has decided to close the company.
Eugene Braila
September 28, 2022Thank you for your question. Yes, a shareholder can claim a business investment loss. A taxpayer's business investment loss is basically a capital loss from a disposition of shares in , or a debt owing to the taxpayer by, a small business corporation where the disposition is: *to an arm's-lenght person; or * one to which subsection 50(1) applies. (Subsection 50(1) election 1.20 In circumstances where subsection 50(1) applies in respect of property of a taxpayer that is a debt owing to the taxpayer, or a share in a corporation, the taxpayer is deemed to have disposed of the debt or share at the end of the tax year for nil proceeds and to have immediately reacquired it at a cost of nil. The deemed disposition can result in a capital loss. In circumstances where the property is a debt or share in an SBC, such loss may result in a business investment loss.) One-half of this loss is an allowable business investment loss (ABIL). Unlike ordinary allowable capital losses, an ABIL for a tax year may be deducted from all sources of income for that year. Generally, an ABIL that cannot be deducted in the year it arises is treated as a non-capital loss. A non-capital loss arising from an ABIL can be carried back three years and forward up to ten years to be deducted in calculating taxable income of such other years. Any such loss that is not deducted by the end of the ten-year carryforward period is then treated as a net capital loss, which can be carried forward indefinitely to be deducted against taxable capital gains. For more information regarding the Business Investment Loss see CRA Income Tax Folio S4-F8-C1, Business Investment Losses https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-4-businesses/series-4-businesses-folio-8-losses/income-tax-folio-s4-f8-c1-business-investment-losses.html
Bob
January 3, 2023just stumbled on your web page - will print out and further research but if I may I am unclear a question? 1/ assets foreclosed so loss of equity, therefore no reserve to payout shareholder loans - what are the Debit / Credit entries to clear out the Loans - Balance sheet only OR also P/L to record the loss should the company stay alive and try another venture. 2/ similar, an associated company has shareholder loans, BUT only half towards the loan to the foreclosed company - what are the debit / credits to record the reduced shareholder loan for that scenario.
Eugene Braila
January 12, 2023Hi Bob, thank you for your post. The unpaid shareholder loan may qualify as a Business Investment Loss, but more information is needed. For more information please review the Income Tax Folio S4-F8-C1, Business Investment Losses https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-4-businesses/series-4-businesses-folio-8-losses/income-tax-folio-s4-f8-c1-business-investment-losses.html
David Nicholls
January 10, 2023I lent money to Lending Loop. They had some charged off loans, which show up on my income statement. Can these amounts be tax deductible?
Eugene Braila
July 26, 2023It depends; in this case more information is needed. Regards, Eugene
Craig
July 14, 2023Hello Eugene - thanks for the informative website. If I lend my own corporation money which is classified as 'Due to Shareholder' on the balance sheet and deem this amount unrecoverable, can this amount be claimed as a capital loss (Opco)? I have a commercial property in another corporation (Holdco) which I would like to sell and I'm wondering whether I can offset some of this capital gain with a capital loss from the Opco. Thx!
Eugene Braila
July 26, 2023Hi Craig, thank you for your question. The shareholder loan in Opco may qualify as Allowable Business Investment Loss - for more information see Income Tax Folio S4-F8-C1. You will be able to claim ABIL on your personal tax return. https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-4-businesses/series-4-businesses-folio-8-losses/income-tax-folio-s4-f8-c1-business-investment-losses.html Regarding the commercial property in Holdco - the capital gain will be realised by Holdco, and reported on Holdco's corporate tax return; 50% of the capital gain will be registered as CDA account for Holdco; Holdco will be able to pay a capital dividend from the CDA account. (tax free dividend to shareholders). When Holdco declares a taxable dividend, you may use the ABIL from Opco to offset you taxable income as ABIL for a tax year may be deducted from all sources of income for that year. Regards, Eugene
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October 30, 2023Keep this going please, great job!