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: Capital loss re unpaid loans in specific fact situation..
Position: Pursuant to subparagraph 40(2)(g)(ii) of the Act loss is nil.
Reasons: Loans were non interest bearing and no adequate consideration received.
XXXXXXXXXX 2000-000146
Wm. P. Guglich
March 27, 2000
Dear XXXXXXXXXX:
Re: Capital Losses
This is in reply to your letter received on January 13, 2000, by the XXXXXXXXXX Tax Services Office requesting the Agency's views as to whether you could claim a capital loss in respect of unpaid loans.
You indicate that in XXXXXXXXXX, you made a loan to a company solely owned (one Class A share) by your former spouse (you last lived together in XXXXXXXXXX and divorced on XXXXXXXXXX). The loan proceeds were used by the company to purchase a XXXXXXXXXX business. You made additional cash loans to cover the company's operating expenses for the fiscal periods ending XXXXXXXXXX, as the company suffered a net loss in each year.
A formal loan agreement was not drawn up and the loan did not bear any interest. However, the loans were made on a verbal agreement of your acquisition of one Class A share in due course.
In XXXXXXXXXX, the company sold the business at a loss and your loan has not been repaid.
You specifically inquired whether you could deduct the losses on the loans from wages earned and your RRSP income.
The Agency's general position regarding capital losses and bad debts is set out in Interpretation Bulletins IT-159R3, Capital Debts Established to be Bad Debts and IT-239R2, Deductibility of Capital Losses from Guaranteeing Loans for Inadequate Consideration and from Loaning Funds at less than a Reasonable Rate of Interest in Non-arm's Length Circumstances (copies enclosed).
As stated in paragraph 1 of IT-159R3, where a taxpayer establishes that an amount receivable on capital account (other than in respect of the disposition of a personal-use property) has become a bad debt in a taxation year, subsection 50(1) of the Income Tax Act (the "Act") provides for a deemed disposition at the end of the year for proceeds equal to nil and a reacquisition immediately thereafter at a cost of nil. This normally results in a bad debt being a capital loss for the year with any recovery of the debt being a capital gain. However, pursuant to subparagraph 40(2)(g)(ii), of the Act a taxpayer's loss arising from the disposition of a debt is nil unless the debt had been acquired by the taxpayer for the purpose of gaining or producing income from a business or property (see paragraph 2 of IT-159R3).
In the situation you described, the loan was non-interest bearing and you do not indicate that any other adequate consideration was received in respect of the loan. Consequently, the debt would not be considered to have been acquired for the purpose of gaining or producing income from a business or property (see paragraphs 4 and 5 of IT-239R2). Whether in a specific case adequate consideration in respect of a loan was received is a question of fact which can only be determined after all the facts and details have been established and reviewed.
We trust our comments will be of assistance.
Yours truly,
John Oulton
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
c.c. Client Services Division
Montreal Tax Services Office
??
- 2 -
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2000
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2000