29 March 1995 External T.I. 9502255 - ABIL

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Is a corp insolvent at year end when in fact it may become solvent later on.

When does a business cease.

Position TAKEN:

Corp could be insolvent at year end and become solvent later in the next year without changing its "insolvent" status at year end.

Cessation of business takes place when normal business activities cease.

Reasons FOR POSITION TAKEN:

Insolvency, Matter of fact

Cessation of business, determination of fact

		950225
XXXXXXXXXX	A.M. Brake

Attention: XXXXXXXXXX
March 29, 1995

Dear Sirs:

Re: Subparagraph 50(1)(b)(iii) of the Act

This is in reply to your letter of January 24, 1995, wherein you outlined a fact situation and asked for confirmation that a taxpayer in the fact situation would be entitled to claim an Allowable Business Investment Loss in 1994. During our recent telephone conversation (XXXXXXXXXX/Brake), it was concluded that your main area of concern related to the interpretation of subparagraph 50(1)(b)(iii) of the Act as it relates to the insolvency test.

Although you have asked for a technical interpretation, the situation presented appears to be an actual fact situation. Should this situation involve a proposed transaction, you may wish to submit all relevant facts and proposed transactions for a binding advance income tax ruling. However, should this situation involve actual taxpayers and completed transactions you may wish to submit all relevant facts and documentation (including company names and identification numbers) to the appropriate District Taxation Office for their comments. We are, however, prepared to provide some general comments.

Our comments

Paragraph 50(1)(b) sets out circumstances which must be present in order that "the taxpayer shall be deemed to have disposed of the debt or share, as the case may be, at the end of the year..." (referring to the shareholder's year where shares are involved). Subparagraph 50(1)(b)(iii) deals with insolvency situations and reads, in part,

"(iii) at the end of the year, the corporation is insolvent ..."

The dictionary defines "insolvent" as follows: "unable to pay its debts". Since this term is not defined in the Income Tax act it is our view that the word "insolvent" should be given its ordinary meaning and it would be a determination of fact based on the facts of a particular situation whether a corporation was insolvent at a particular time.

Not only is it necessary that a corporation be insolvent at the end of the year, it must also satisfy the other conditions as set out in clauses (A) and (B) of subparagraph (iii) in order to qualify. Hence, insolvency at a particular time is not sufficient, in and by itself, to qualify. It could be that a corporation that becomes insolvent during, say, 1994 and remains insolvent at, say, the October 31, 1994 year end of the taxpayer holding the share, could become solvent after that time. Although the corporation was, in fact, insolvent at the 1994 year end of the taxpayer claiming the loss and that part of the test was met, it may not satisfy the other criteria as set out in the provision, including, not carrying on a business at the 1994 year end together with not meeting the clause (A) requirement that "it is reasonable to expect that the corporation will be dissolved or wound up and will not begin to carry on business". In particular, where a corporation that was insolvent becomes solvent it may be more difficult to demonstrate that the corporation satisfied the clause (A) requirement. However, given a situation where at the taxpayer's 1994 year end the fair market value of a share is nil and the corporation is 1) insolvent, 2) not carrying on a business, and 3) in all likelihood will either be wound up or dissolved and the circumstances indicate strongly that the corporation will not commence to carry on business, it would seem, in our view, that it would be appropriate that the loss be recognized in 1994.

Paragraph 2 of Technical Interpretations Bulletin IT-313R contains comments relating to the cessation of business and reads,

"2. Whether a taxpayer has 'ceased to carry on a business' is determined on the facts of each case. Generally, where the normal business activities have ceased and there is little likelihood of the business starting up again in the near future, business is considered to have ceased."

The fact that all former business activities of the corporation ceased prior to the shareholder's year end is an indicator that business ceased to be carried on at that time. The mere subleasing by the trustee of the leased premises, now in the process of being sold by its owners, from which the corporation formerly carried on its business activities, in our view, would not, in and by itself, be sufficient reason to consider that the business was in fact still being carried on when in fact all former business activities have ceased.

We trust our comments will be of assistance to you.

Yours truly,

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch