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:
Whether in the factual situation set out in the request (for our opinion) the forgiven portion of a loan would be considered a business investment loss and consequently deductible by the creditor as an ABIL.
Position TAKEN:
General comments provided
Reasons FOR POSITION TAKEN:
The request appears to relate to actual proposed transactions. The Agency will, as stated in IC70-6R3, only provide certainty on the tax consequences of proposed transactions in the context of a request for an advance income tax ruling.
XXXXXXXXXX 2000-001174
P. Diguer CGA
Attention: XXXXXXXXXX
May 23, 2000
Dear Sir:
Re: Allowable Business Investment Loss ("ABIL")
This is in reply to your letter dated February 29, 2000 in which you request our views on whether the forgiven portion of a loan would be considered a business investment loss and consequently deductible by the creditor as an ABIL given the series of transactions set out in your letter. The expressions "business investment loss" and "allowable business investment loss" as referred to here and subsequently have the meanings assigned by paragraphs 39(1)(c) and 38(c), respectively, of the Income Tax Act (Canada) (the "Act"). In particular, you ask:
(i) Does the low interest rate on the debt somehow affect the loss qualifying as an ABIL?
ii) Does the existence of another loan at a higher interest rate make your loan an "unreasonable rate loan" and would that somehow affect the loss qualifying as an ABIL?
(iii) Does the fact that the loan was originally established at zero-interest with an associated corporation somehow affect the nature of the loan today, and would that affect the loss qualifying as an ABIL?
(iv) If section 80 of the Act applies to the debtor for the forgiven portion of the debt, will the amount by which the ACB of the debt exceeds the amount paid by the debtor at the time of settlement qualify as an ABIL?
The facts outlined in your letter relate to actual transactions involving particular taxpayers. Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular IC-70-6R3 dated December 30, 1996 ("IC-70-6R3"). The Directorate also provides technical interpretations of the various provisions of the Act but we do not provide tax planning advice. Nevertheless, we offer the following general comments which we hope are of assistance to you.
An ABIL is defined in paragraph 38(c) of the Act as 3/4 of a business investment loss. To qualify as a business investment loss, an amount must first be a capital loss. If however, a capital loss is deemed to be nil (e.g., under paragraph 40(2)(g)), no business investment loss can result.
A loss resulting from the disposition of a debt which is a capital property of the taxpayer is deemed to be nil by virtue of subparagraph 40(2)(g)(ii) of the Act unless the debt had been acquired by the taxpayer for the purpose of gaining or producing income from a business or property.
It is a question of fact whether a debt has been acquired for the purpose of earning income from a business or property. However, a debt acquired at no interest by a person who is not a shareholder of the debtor would generally not be considered to have been acquired for the purpose of earning income from a business or property for purposes of subparagraph 40(2)(g)(ii) of the Act.
An increase in the stated rate of interest at some point during the term of the debt would not constitute in and of itself support for a finding that it was acquired for the purpose of earning income from a business or property. As stated in Income Tax Technical News No.14, dated December 9, 1998, the determination of whether a change in the terms of a debt obligation constitutes a disposition and acquisition of a new debt should be made in accordance with the law of the relevant jurisdiction.
If the exception in subparagraph 40(2)(g)(ii) of the Act is met, the capital loss arising on the deemed disposition would qualify as a business investment loss only if the requirements in paragraph 39(1)(c) of the Act are met.
We trust our comments will be of assistance to you.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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