2018-05-09 12:00:34 Borrowing and Loans English Learn how deducting losses from bad debts can help lessen your financial burden from the loss. Whether you suffer a capital loss or an... https://d1bkf7psx818ah.cloudfront.net/wp-content/uploads/2018/04/08122952/Frustrated-Woman-Filing-Capital-Loss.jpg How to File an Election for a Capital Loss on a Bad Debt

How to File an Election for a Capital Loss on a Bad Debt

1 min read

Did you loan some money only to realize you’re not getting paid back? If you file the right paperwork, you could get a reduction in your income taxes to lessen the pain.

As a rule, bad debts are considered to be a capital loss. This means you can deduct them to offset capital gains and capital gains only. To do so, you must add a signed letter to your tax return stating that you want to make an election under section 50(1) of the income tax act. The Canada Revenue Agency processes this letter at the same time as your income tax return.

The problem is that capital losses are not that great from a tax point of view. Like most people, you may not have capital gains to offset, since those are relatively rare. But there is a special kind of loss, known as an Allowable Business Investment Loss, that is much more generous.

ABILs are created when the bad debt results from a loan made to a small business corporation in an arm’s length transaction. In that case, the loss is not treated like a capital loss but rather as a bit of a special snowflake. Through a wave of the legislator’s magic wand, it is considered to be a non-capital loss. As such, it can be used to offset all types of income, such as salaries, earnings from a business, or interest. Odds are that you can reduce your taxes almost immediately.

To claim the deduction, you need to make the same section 50(1) election for capital losses. The distinction between regular capital losses and ABILs can sometimes be difficult to make. This is a case where you might want to consult a professional before filing the election to make sure you’re getting it right.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

Related Articles

Achieving Success When Filing Income Tax Objections With the CRA

What happens if you and your client disagree with a ruling from…

Read more

Documents You'll Need When Starting a Canada Nonprofit Organization

In many ways, setting up a Canada nonprofit is similar to setting…

Read more

Filing Taxes for Nonprofit Clients

Although nonprofit organizations and charities aren’t run for personal profit, they still…

Read more