CRA provides expanded comments on business investment loss issues in its new Folio

The new Folio on business investment losses covers more ground than IT-484R2, including:

• Guidelines on when CRA may accept a request to revoke a s. 50(1) election, e.g., where the taxpayer was not aware of the loss being denied under s. 40(2)(g)(ii) (i.e., no carte blanche).
• There is an extensive example illustrating the adverse application of s. 50(1.1) to a non-arm’s length person who started carrying on business in a corporation acquired by her from the taxpayer who had claimed an insolvency loss re the corporation.
• In a somewhat grudging acknowledgement of the case law, CRA states that “while there is no legal requirement that in all cases a taxpayer must exhaust all legal means of collecting on a debt before determining that during the year it had become a bad debt, such a determination will generally fall short if it is evident that collection on the debt is reasonably possible but no proactive steps were taken to collect on it,” and that “the existence of a non-arm’s-length relationship between the creditor and the debtor ... will not prevent the creditor from establishing that a debt has become a bad debt.” (However, CRA still considers that all of a debt must be bad to be written off under s. 50.)
• Before summarizing some of the s. 40(2)(g)(ii) jurisprudence, CRA states that

The burden of demonstrating a sufficient connection between the taxpayer’s loan to (or the taxpayer’s guarantee of the debts of) the debtor and the potential for income will be much higher in situations where the taxpayer is not a direct shareholder of the debtor.

• CRA provides an extended example illustrating the s. 39(9) rule (re the previous claiming of the capital gains exemption).

Neal Armstrong. Summaries of S4-F8-C1 ”Business Investment Losses” under s. 50(1), s. 248(1) – small business corporation, s. 50(1.1), s. 50(1)(a), s. 40(2)(g)(ii), s. 39(9) and s. 164(6).