If at the end of a year, you are owed a loan amount that is no longer collectible, you may be able to realize a capital loss on the loan. You may deduct this capital loss but only to the extent you have realized capital gains on other property.

The capital loss, calculated as a disposition of the loan for nil proceeds, is realized at the end of the year if you elect to do so on your income tax return and you establish that the loan has become a bad debt in the year.

For the loss to be permitted, 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.

As this loss may also be an allowable business investment loss that is deductible not only against capital gains but against other income, you may wish to consult a Chartered Accountant before reporting such a loss on your tax return.

Information for Tax Tips is provided as a public service by the Chartered Accountants of British Columbia.