Small business corporation shares

The definition sits in subsection 248(1) of the Income Tax Act, is subject to subsection 110.6(15), and is tested at a particular time. Paragraph 39(1)(c) uses it: a business investment loss is measured from a capital loss on disposing of a share of a small business corporation, or certain debts, to an arm’s-length person or in a case to which subsection 50(1) applies, less amounts the paragraph lists. For that paragraph, the definition also includes a corporation that was a small business corporation at any time in the 12 months before. The CRA says you may be able to deduct a portion of a business investment loss from income, and that portion is the allowable business investment loss.

How it differs from QSBC shares

Qualified small business corporation shares are a separate test in section 110.6(1), used for the capital gains deduction. It adds a requirement that, throughout the 24 months before, the share was not owned by anyone other than the individual or a related person or partnership, and an asset test over that period, so do not assume that shares meeting one test meet the other. See QSBC shares.

What to ask

• What assets did the corporation hold at the time, and how were they used?
• Was the corporation a Canadian-controlled private corporation?
• Was the other party at arm’s length, or does subsection 50(1) apply?

See also allowable business investment loss and the answer on whether your shares qualify for the capital gains exemption.