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Allowable Business Investment Loss (ABIL) (Nov 2025)

What is an ABIL?

Think of an ABIL as a tax safety net for investors. If you invest money in a small Canadian business and that business fails (goes bankrupt or shuts down), the government allows you to use that loss to lower your tax bill.

Why is it Special?

Normally, if you lose money on an investment (like a stock), it is called a "Capital Loss." You can only use a Capital Loss to cancel out Capital Gains (profits from selling other investments).

An ABIL is better. It allows you to use your loss to cancel out ANY type of income, such as:

• Your salary from a job.

• Rental income.

• Interest income.
  This can result in a much larger tax refund than a regular capital loss.

How the Math Works (Simple Example)

You are allowed to claim 50% of the money you lost as a tax deduction.

Example:

Imagine you earn $100,000 a year from your job. You also invested in a friend's startup that failed, losing you $50,000.

• Your Total Loss: $50,000

• Your ABIL Deduction (50%): $25,000

The Result:

Instead of paying taxes on your full $100,000 salary, you only pay taxes on $75,000 ($100,000 - $25,000).

• If your tax rate is 40%, this could save you $10,000 in taxes immediately.

The 3 Rules to Qualify

Not every lost loan or investment counts. To claim this, you must meet three conditions:

1. It Must be a "Small Business Corporation" (SBC):
   The company must be a Canadian-Controlled Private Corporation (CCPC), and at least 90% of its assets must be used for active business in Canada.

2. You Must Have Expected to Make Money:
   You cannot claim an ABIL if you gave money just to be nice. You must prove you invested to earn dividends, interest, or profit.

3. The Loss Must be "Realized":
   You can't just say the business is doing poorly. You must have sold the shares at a loss, or the company must be officially bankrupt/insolvent.

Examples: What Counts and What Doesn't?

✅ This Counts (Qualifies)

Buying Shares: You buy shares in a startup because their business plan shows they will make a profit and pay you dividends.

Official Loan: You lend money to a small business with a signed contract that says they must pay you interest.

❌ This Does NOT Count

Emotional Support: You buy shares in your cousin's art studio just to support their hobby, even though it never makes money.

Informal Help: You lend cash to a friend for their business without any paperwork or interest rate (the CRA sees this as a personal gift).

What if I Don't Need the Deduction Right Now?

If you have a huge loss but your income this year is low, you don't lose the benefit. You can move the deduction around:

• Go Back in Time: Apply the loss to reduce your taxes from the last 3 years (getting a refund on past taxes).

• Save it for Later: Carry the loss forward to reduce your taxes for the next 10 years.

How to File

• Forms: You claim this on Line 21700 of your tax return and fill out Schedule 3.

• Proof: Keep your share certificates, loan agreements, and proof of the company's bankruptcy in case the CRA asks for them.

Claiming an Allowable Business Investment Loss (ABIL) is one of the highest-risk claims you can make on a tax return. Because the tax benefit is so generous (canceling out any income, not just capital gains), the Canada Revenue Agency (CRA) reviews these claims very aggressively.

Here are the specific risks you face when claiming an ABIL, explained in simple terms.

1. High Probability of Audit

This is not a "fly under the radar" deduction.

• The Risk: There is a very high chance the CRA will flag your return for a review.

• Why: An ABIL often generates a large tax refund. The CRA's system automatically flags large deductions that wipe out regular income. You should assume you will be asked to prove it.

2. The "Family & Friend" Trap (Income Intent)

This is the #1 reason claims are denied for regular people.

• The Rule: You cannot claim an ABIL on money you lost because you were trying to "help out." You must prove you invested to make a profit.

• The Risk: If you loaned money to a child, spouse, or friend without a formal contract, the CRA will say it was a personal gift, not a business investment.

• How to protect yourself: You need a signed loan agreement that clearly states an interest rate and repayment terms, even if it's family.

3. The "Small Business" Technicality

Even if you lost money in a real business, the company itself might not qualify technically.

• The Rule: To be a "Small Business Corporation" (SBC), 90% or more of the company's assets must be used for "active business" in Canada.

• The Risk: If the company held too much cash, passive investments, or sat idle for too long before closing, the CRA will rule it was not an SBC at the time of the loss. Your ABIL will be denied and converted to a regular Capital Loss (which is much less useful).

4. Missing the "Deemed Disposition" Deadline

If the business hasn't actually been sold but has just gone bust, you have to file a specific election to claim the loss.

• The Risk: If you simply write off the loss on your tax return without formally electing under Section 50(1) of the Income Tax Act, the CRA can deny the entire claim because you technically still "own" the debt or shares.

• The Fix: You must declare the debt as "bad" in the specific year it went bad. You can't wait 3 years and then decide to claim it retroactively without penalty.

5. Financial Consequences (Interest & Penalties)

If your claim is audited and denied:

• Reassessment: You will have to pay back the tax refund you received.

• Interest: You will be charged interest on that money dating back to when you filed the return.

• Penalties: If the CRA decides you were "grossly negligent" (e.g., claiming a loss for a business that never really existed), they can hit you with a penalty of 50% of the tax avoided.

Summary Checklist to Lower Risk

Before claiming, ensure you can say "Yes" to these if an auditor asks:

• [ ] Do I have a share certificate or loan agreement signed and dated?

• [ ] Can I prove the company was an active "Small Business Corporation" (SBC)?

• [ ] Is the company legally bankrupt, or do I have proof the debt is 100% uncollectible?

• [ ] Did I charge interest on the loan (to prove profit motive)?

Spousal Support Claim (Oct 2025)

The Core Principle: Taxable and Deductible

The main rule for spousal support in Canada is the "inclusion/deduction" rule, which means:

1. For the Payer (the person paying support): The periodic spousal support payments are tax-deductible. This means you can subtract the amount you paid from your total income, which reduces the amount of tax you owe.

2. For the Recipient (the person receiving support): The payments are taxable income. This means you must report the amount you received as income on your tax return, and you will pay tax on it.

This system is designed to share the tax burden, moving the income and the tax liability from the higher-earning spouse (the payer) to the lower-earning spouse (the recipient), who is typically in a lower tax bracket.

Important Conditions: When the Rule Applies

The taxable/deductible rule only applies if the payments meet several strict CRA criteria, which must be clearly set out in a formal, legal document:

• Formal Agreement is Required: The payments must be made under a formal written agreement (like a separation agreement) or a court order. Informal arrangements or voluntary gifts do not count.

• Periodic Payments: The payments must be an "allowance payable on a periodic basis" (e.g., weekly, monthly, quarterly). Lump-sum payments (a single large payment) are generally not deductible by the payer or taxable to the recipient, although there are exceptions for retroactive payments.

• For Spousal Support Only: The rule applies only to spousal support.

  • Child Support is Different: Payments made solely for child support are not deductible by the payer and are not taxable to the recipient.

  • Mixed Payments: If the agreement specifies both spousal and child support, the child support portion must be paid in full first.

Important Steps Required

To make sure you qualify for the deduction or correctly report the income:

1. Register the Agreement: The person paying support (the payer) often has to register the court order or written agreement with the CRA using Form T1158, Registration of Family Support Payments.

2. File Correctly: Both parties must report the payments on their tax returns (Line 21999/22000 for the payer; Line 12799/12800 for the recipient).

Canadian taxpayer wins against the CRA over a tax deduction for moving expenses (Oct 2025)

The Core Issue

• The Rule: To deduct moving expenses in Canada, your new home must be at least 40 kilometres closer to your work location than your old home.

• The Dispute: A taxpayer moved closer to his job and claimed the deduction. The CRA rejected it, saying the distance saved was less than 40 km based on their measurement. The taxpayer argued that when calculating the distance using actual roads (like with Google Maps), the distance was indeed more than 40 km shorter.

• The Outcome: The court sided with the taxpayer.

The Significance 

The judge's ruling is important because it sets a new precedent for how the CRA must measure the distance for this tax deduction.

The key points are:

1. Google Maps Approved: The court officially recognized the use of tools like Google Maps to determine "the shortest normal route of public travel."

2. Real-World Commute Wins: This means the distance should be measured using the actual roads a person drives, not an unrealistic "straight line" (as the crow flies) or an overly complex, impractical route the CRA might previously have used to deny the claim.

In short, the decision makes it easier for taxpayers to prove their move qualifies for the deduction by using widely accepted technology to calculate their new, shorter commute distance.

Navigating Canada's New Short-Term Rental Tax Rules (June 2025)

Starting in 2024, Canada has introduced significant changes to its tax code affecting short-term rental properties. The primary goal of these amendments is to disallow expense deductions for certain "non-compliant" short-term rentals.

Understanding the New Expense Deduction Rules

Traditionally, owners of rental properties could deduct various expenses for tax purposes, including maintenance, utilities, insurance, and mortgage interest. However, under the new legislation, these deductions will be denied for short-term rentals classified as non-compliant.

A short-term rental is defined as a residential property rented for periods of fewer than 90 days. A rental is considered "non-compliant" if it:

• Fails to meet registration, licensing, and permit requirements.

• Is located in a city or municipality where short-term rentals are prohibited.

If a short-term rental is non-compliant for only part of the tax year, only the expenses incurred during that non-compliant period will be non-deductible. The non-deductible amount is calculated using the following formula:

A×(B/C)

Where:

• A = Total expenses on the property during the year.

• B = Number of days the property was non-compliant during the year.

• C = Number of days the property was available as a short-term rental during the year.

Example: Imagine a property rented for short-term stays throughout the year, with total annual expenses of $40,000. If the owner only obtained their short-term rental license on April 1st, the property was non-compliant for the first 90 days of the year.

Using the formula:

• A=$40,000 (total expenses)

• B=90 (days non-compliant)

• C=365 (days available as short-term rental)

Non-deductible expenses = $40,000×(90/365)=$9,863.01

Therefore, the owner could only deduct $30,136.99($40,000−$9,863.01) in expenses against their rental revenue for the year.

2024 Transition Rule: For the 2024 tax year only, if a short-term rental property achieves compliance by December 31, 2024, it will be deemed compliant for the entire year. This measure, implemented by the Canada Revenue Agency (CRA), aims to facilitate initial compliance with the new regulations.

Recommendations for Short-Term Rental Owners

To avoid being deemed non-compliant and losing expense deductions, short-term rental property owners should take the following steps:

1. Check Local Regulations: Before renting out a property short-term, thoroughly research local bylaws to confirm that short-term rentals are permitted in your area.

2. Understand Requirements: If permitted, identify and understand all specific regulations, including licensing, zoning, and permit requirements.

3. Obtain Necessary Permits/Licenses: Apply for and secure any required permits or licenses to ensure full compliance.

4. Maintain Meticulous Records: Keep all expense receipts. This is crucial for verification in the event of a CRA audit.

5. Consult a Professional: If you have any uncertainty regarding compliance requirements or maximizing deductions, it is highly recommended to consult with an accountant.

HST and Short-Term Rentals

The application of Harmonized Sales Tax (HST) to short-term rentals also requires careful consideration:

• General Rule: HST is generally exempt for long-term residential rentals but is charged on short-term rentals.

• Mandatory Registration: If a short-term rental property owner earns more than $30,000 in income over four consecutive three-month periods, they are required to register for HST in the quarter their income exceeds this threshold. This obligates them to collect and remit HST on their sales, but also allows them to claim input tax credits (refunds) for HST paid on eligible expenses.

• Small Supplier Exemption: If income over four consecutive quarters never reaches $30,000, the owner is considered a "small supplier" and is not required to register for HST. However, they can choose to register voluntarily.

First Home Savings Account (FHSA) (May 2025)

The First Home Savings Account (FHSA) is a powerful new registered plan in Canada designed to make homeownership more accessible. It offers a unique combination of tax benefits: your contributions can be tax-deductible on your income tax returns, and when you make qualifying withdrawals to purchase or build your first home, those funds are not included in your income – meaning they're tax-free!

Who Qualifies for an FHSA?

To open an FHSA or make a qualifying withdrawal, you need to meet specific "First-Time Home Buyer" criteria. 

• General First-Time Home Buyer Definition: You (and your spouse or common-law partner, if applicable) must not have owned or jointly owned a qualifying home as your principal residence at any point during the calendar year the account is opened (or withdrawal is made) or in the four preceding calendar years.

• To Open an FHSA: In addition to the above, your spouse or common-law partner must not have owned a qualifying home as their principal residence at any time during the year you open the account or the four previous calendar years.

• Other Eligibility for Opening: You must also be a Canadian resident, at least 18 years old, and 71 years old or younger as of December 31st of the year you open your FHSA.

Example: Let's say John, 27, bought a property when he was 19 and has always rented it out, never living in it himself. He currently rents an apartment as his principal residence. John would be eligible to open an FHSA because, even though he owns property, it has never been his principal residence. His principal residence is currently rented.

Contributing to Your FHSA: Room and Limits

Once your FHSA is established, you can immediately begin contributing, but only up to your available FHSA contribution room.

• Initial Room: In the year you open your FHSA, you receive $8,000 in contribution room.

• Annual Room: You'll gain another $8,000 in contribution room each subsequent year.

• Lifetime Maximum: The total lifetime contribution room is capped at $40,000.

• Multiple FHSAs: If you've opened more than one FHSA, your total contribution room is shared across all your accounts.

• Carry Forward Rules: Unused contribution room does carry forward to future years. However, there's a specific rule: only $8,000 of unused contribution room can carry forward from one year to the next. For example, if you open your account and don't contribute for two full years, in the third year, your accumulated room won't be $24,000 ($8k + $8k + $8k), but rather $16,000 ($8,000 for the current year plus the $8,000 maximum carry-forward from previous unused room).

Making Transfers To and From Your FHSA

The FHSA allows for certain transfers that can be beneficial:

• Direct Transfers: You can generally make direct transfers between your RRSP and FHSA, or between different FHSAs, without triggering immediate tax consequences. For an RRSP to FHSA direct transfer, you'll need to complete Form RC720. For transfers between FHSAs, use Form RC721.

• Important Note on RRSP Transfers: While direct transfers from an RRSP to an FHSA are tax-deferred, this type of transfer reduces your FHSA participation room and does not restore your RRSP deduction room.

• Indirect Transfers: Be aware that withdrawing funds from one account (RRSP or FHSA) and then contributing them to another FHSA is considered an "indirect transfer" and will result in immediate tax consequences.

• Spousal/Common-Law RRSP Transfers: Transfers from a spousal or common-law RRSP are permitted, but not if the spouse or common-law partner contributed any amounts to any spousal or common-law partner RRSPs in the current year or the two previous years.

Tax Deductions for FHSA Contributions

A key benefit of the FHSA is the ability to deduct contributions made to your account on your income tax return. However, transfers (from an RRSP or between FHSAs) are not deductible. The maximum lifetime deduction you can claim is your $40,000 lifetime contribution limit, reduced by any amounts directly transferred from your RRSP to your FHSA. Any FHSA contributions you make but don't claim as deductions in the current year can be carried forward and deducted in future years, even if your FHSA account closes.

Making a Qualified (Tax-Free) Withdrawal

For withdrawals from your FHSA to be tax-free (known as "qualified withdrawals"), you must meet several conditions at the time of withdrawal:

• You must be a First-Time Home Buyer at the time of withdrawal (meeting the specific criteria for withdrawals).

• You must have a written agreement to buy or build a home before October 1st of the year following the year the withdrawal is made.

• You must not have acquired the home more than 30 days before the withdrawal date.

• You must be a resident of Canada when you acquire the home.

• You must occupy or intend to occupy the home as your principal residence within one year after buying or building it.

• You must complete Form RC725.

FHSA Overcontributions and Penalties

It's crucial to manage your FHSA contributions carefully to avoid overcontributions. If you overcontribute, a penalty of 1% per month is applied to the highest excess contribution amount in your FHSA for that given month.

Example: If you open your FHSA on May 1st and contribute $9,000, and then add another $1,000 on May 14th, your penalty for May would be $20 (1% of the $2,000 excess, as your room was $8,000). If you then contribute another $1,000 on June 1st, and make no further contributions in June, your penalty for June would be $30 (1% of the $3,000 excess).

To reduce or eliminate excess contributions, you must make either a designated withdrawal (up to the amount of your contributions) or a designated transfer (up to the amount transferred from your RRSP to your FHSA). If both contributions and transfers led to the overcontribution, you might need a combination of both to correct it.

When Your FHSA Closes

Your FHSA is not meant to be a permanent account. It will automatically close on December 31st of the earliest year in which any of the following events occur:

• The 15th anniversary of opening your very first FHSA.

• The year you turn 71 years old.

• The year after you make your first qualified withdrawal from your FHSA.

If there's any remaining property in your FHSA when it loses its FHSA status, that amount will be included in your income at its fair market value. However, you have the option to make a direct transfer of these remaining funds to your RRSP or RRIF account on a tax-deferred basis, and this transfer will not affect your RRSP deduction room or your FHSA participation room.

T1135 Foreign Income Verification Statement (April 2025)

There are severe financial penalties for failing to comply with the CRA foreign reporting requirements. The penalty for failure to file is up to $2,500 per year, even if you do not owe any taxes. If you hold any of the specified foreign property described below and at any point in the year the total cost was more than $100,000, please contact us to discuss whether you need to file this form and what information we need.

All Canadian resident taxpayers are required to file a T1135 Foreign Income Verification Statement if at any time in the year the total cost of all specified foreign property was more than $100,000 CAD. The form is due April 30 for most individuals, or June 15 for self-employed individuals.

Specified foreign property includes:

• Funds (i.e. USD bank account with Wells Fargo) or intangible property (i.e. patents, copyrights) situated, deposited, or held outside Canada

• Tangible property situated outside of Canada (i.e. real estate)

• Shares of a foreign corporation

• Interest in a foreign trust

• Debt owed by a non-resident, including government and corporate bonds, debentures, mortgages, and

• Loans receivable

• Interest in a foreign insurance policy

• Precious metals, gold certificates, and futures contracts held outside Canada

• Cryptocurrency such as Bitcoin and Ethereum, and NFTs

Specified foreign property does not include:

• Property that is primarily personal use (i.e. Florida condo that is not rented)

• Foreign property held in an RRSP, RRIF, or TFSA account

• Foreign property held by a Canadian mutual fund

• Foreign pension plans (i.e. 401(k), IRA, Roth IRA)

• Foreign funds held in a Canadian bank account (i.e. USD bank account with CIBC)

Compilation Engagements (signed financials for a lender) 

What Small Businesses Need to Know About New Rules

For years, many small business owners in Canada have been familiar with "Notice to Reader" financial statements that included a covering letter by a CPA office. They were a common and relatively simple way to get a snapshot of your company's financial health, often used for tax filing or basic internal review.

The old "Notice to Reader" standard (officially called Section 9200) has been replaced by a new, more robust standard from CPA Canada, known as CSRS 4200 – Compilation Engagements. This change came into effect for financial statements with periods ending on or after December 14, 2021.

The old standard had some limitations and didn't always provide sufficient clarity about the CPA's role and responsibilities. The new Compilation Engagement standard aims to provide greater transparency and clarity for both clients and users of the financial statements.

Introducing the New Compilation Engagement

Think of the Compilation Engagement as an enhanced version of the "Notice to Reader." While it still doesn't provide assurance (like a review or an audit), it requires your CPA to perform additional, specific procedures to ensure the financial information is not "materially false or misleading" on the surface.

Here's a breakdown of the key differences and what's involved:

1. More Defined Procedures: Under CSRS 4200, accountants now have more explicit requirements for understanding your business and your accounting system. This involves:

   • Gaining a deeper understanding of your business: What are your operations? Who are your key customers and suppliers? What are your significant revenues and expenses?

   • Understanding your accounting records: How do you keep track of your transactions? What software do you use?

   • Inquiring about significant judgments: We'll discuss any major accounting decisions you've made throughout the year.

2. Addressing Inconsistencies: If during our work we come across information that seems incorrect, incomplete, or inconsistent, we are now required to investigate further and ask you for explanations. 

3. Required Engagement Letter: A detailed engagement letter is now mandatory, clearly outlining the responsibilities of both the client and KLCA, for the compilation. This ensures everyone is on the same page.

4. Updated Report: The new Compilation Engagement Report itself is more detailed than the old "Notice to Reader." It clearly states that we have not audited or reviewed the financial statements and therefore do not express an opinion or conclusion on them. It also explicitly clarifies the responsibilities of both management and the CPA, and includes a note describing the basis of accounting (e.g., cash basis, tax basis).

Who Uses a Compilation Engagement Report?

The compiled financial information is still primarily for the use of Management and Owners for making decisions. However, the report is often a requirement when there are third-party users who need to see a professionally prepared financial summary.

Typical users who would request this report include:

• Banks and Lenders: For initial loan applications, renewals, or to monitor compliance with basic loan covenants.

• Canada Revenue Agency (CRA) / Tax Authorities: While the information is used to prepare the tax return, the compiled statements provide a clear, standardized set of financials that supports the tax filing.

• Suppliers or Creditors: To assess your company's creditworthiness before granting large credit limits.

• Bonding or Insurance Companies: To assess the financial stability of the business.

• Potential Investors or Buyers: For preliminary due diligence on the business's financial position.

Why the New Standards Mean Higher Costs (Typically $1,000 and Up)

You might be wondering, "Why does this cost more?" The simple answer is: more work is involved.

Because we are now required to perform these additional procedures – understanding your business more deeply, inquiring about judgments, and addressing inconsistencies – it takes more time and professional judgment to complete a Compilation Engagement properly.

While the exact cost will always depend on the complexity and volume of your transactions, you should generally expect a Compilation Engagement to start from around $1,000 and go upwards from there, reflecting the increased due diligence and professional responsibility. This is a significant change from the often lower fees associated with the old "Notice to Reader."

What Does This Mean for You?

Ultimately, these new standards are a positive step towards greater transparency and higher quality financial reporting for small businesses and the third parties who rely on your numbers. While it means a slightly more involved process and an increased investment, it ensures that the financial information we compile for you is more reliable for its intended purpose.

CDA Dividend (tax free dividend to shareholder) 

The Capital Dividend Account (CDA) is one of the best tax benefits for owners of private Canadian companies. Here is a simple breakdown of what a CDA dividend is and how the process works:

1. What is a CDA Dividend?

A CDA dividend is money paid by a private corporation to its shareholder(s) that is completely tax-free for the recipient.

• Simple term: It's a way for the company to pass certain types of income directly to its owner without the owner having to pay personal income tax on it.

• Contrast: A regular dividend is usually taxed at the shareholder's personal tax rate. A CDA dividend is not taxed at all.

2. How the CDA Pot is Created 

The CDA is a running total of the corporation's "non-taxable" income.

The main way the CDA gets money is through Capital Gains:

• When a corporation sells an asset (like stocks, mutual funds, or real estate) for a profit, that profit is called a capital gain.

• Under Canadian tax law, only 50% of a capital gain is taxable.

• The other 50% (the non-taxable half) is immediately added to the company's Capital Dividend Account. This is the money that can later be paid out tax-free to the shareholder.

3. The Process and Filing with the CRA

To pay out a CDA dividend, a few formal steps must be followed:

Step A: The Calculation

Calculate the exact balance available in the CDA as of the day before the dividend is paid using CRA form 89.

Step B: The Payment to the Shareholder

The company’s Board of Directors (or the owner, if they are the only director) must pass a formal resolution (a written decision) to declare the Capital Dividend. The corporation then transfers the cash to the shareholder.

Step C: Filing with the CRA

After the dividend is paid, the corporation must formally "elect" (choose) for the payment to be a CDA dividend by filing Form T2054, Election for a Capital Dividend. This form tells the Canada Revenue Agency (CRA) exactly how much money was paid and confirms that the company had enough in its CDA to cover the payment.

4. The Deadline 

The deadline for filing the Form T2054 is extremely strict. The form must be filed with the CRA on or before the day the dividend is paid (or becomes payable).

Why this matters: If the company pays the dividend and then files the form even one day late, the CRA can treat the entire payment as a regular taxable dividend and apply penalties, potentially costing the shareholder their tax-free status.