We recently discussed Allowable Business Investment Losses (“ABILs”) in Tax Tip 12-12. As a follow-up, a recent Tax Court of Canada decision Dhaliwal v. The Queen Dhaliwal highlights some of the administrative challenges that a taxpayer can face when claiming an ABIL. It is almost a certainty that a taxpayer’s ABIL claim will be reviewed by the Canada Revenue Agency (CRA). Dhaliwal highlights some of the challenges that many taxpayers encounter with the CRA when dealing with such a claim.
Mr. Dhaliwal was an employee of Mainland Sound and Communication Inc. In 2005, he loaned approximately $150,000 to Mainland. Ultimately Mr. Dhaliwal was unable to collect his debt, so he claimed an ABIL on his 2007 tax return. The CRA reviewed the ABIL claim and denied it for the sole reason that Mainland had not filed its corporate tax returns and hence the CRA could not determine if Mainland was a “small business corporation” under the Income Tax Act (“the Act”), as it was required to be for Dhaliwal to be allowed to claim the ABIL. However, the Tax Court ruled that the Act does not require the corporate borrower to file its tax returns in order for the creditor to be allowed to claim an ABIL.
The Tax Court also addressed whether Mr. Dhaliwal had made a valid election under the Act, to be able to claim his ABIL. Mr. Dhaliwal had filed his 2007 tax return electronically and the e-filing mechanism did not provide any way for him to make the election “in” his return, as required by the Act. Mr. Dhaliwal simply reported the ABIL on his electronically filed return, and did not mail a letter to the CRA stating that he was making the claim. The CRA took the (rather hard-line) position that Mr. Dhaliwal had not made the election “in” his return, but did not explain how he could have done this when filing electronically. The Tax Court ruled that he had made the election, because he had clearly disclosed the ABIL claim. The CRA did not appeal the decision further.
Practitioners and taxpayers should be somewhat relieved by the decision in Dhaliwal, as it may result in relief from some of the stringent administrative requirements imposed by the CRA when assessing ABIL claims.
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