15 March 2001 External T.I. 2001-0070605 - ALLOW. BUSINESS INVEST. LOSSES

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: An individual owns shares of a corporation. As the shares apparently have no value, we have been asked whether the individual has sustained a business investment loss pursuant to paragraph 39(1)(c) of the Income Tax Act.

Position: We have provided general comments.

Reasons: The information provided was limited.

XXXXXXXXXX 2001-007060
M. Eisner, CA
March 15, 2001

Dear XXXXXXXXXX:

Re: Allowable Business Losses

This is in reply to your letter of February 19, 2001, concerning the above- noted subject.

You have indicated that you purchased shares in XXXXXXXXXX (the "Corporation"). The sole asset of the Corporation has been an interest in a limited partnership (XXXXXXXXXX). You indicate that the limited partnership was either grossly mismanaged or a fraud, such that there is no hope of recovering any money from the partnership or general partner.

You have asked whether you have sustained an "allowable business investment loss".

Our Comments

Our position on allowable business investment losses is set out in Interpretation Bulletin IT-484R2 "Business Investment Losses" which has been enclosed. In order to determine whether a person's loss can be treated as an allowable business investment loss, it is necessary to review all the relevant facts and documentation. Such a review falls within the responsibility of your local tax services office. However, we are prepared to provide you with the following general comments.

As indicated in paragraph 3 of IT-484R2, a taxpayer's business investment loss may arise from the disposition of a share of a corporation that is a "small business corporation". With respect to this term, paragraph 4 of the bulletin indicates that, in general, a small business corporation is a Canadian-controlled private corporation ("CCPC") all or substantially all (i.e., at least 90%) of the fair market value of the assets of which is attributable to assets used principally in an active business carried on primarily in Canada or shares or debts of connected small business corporations or a combination of the two. It is our view that where a corporation has a partnership interest as one of its assets, it is the underlying partnership's assets (to the extent of the corporation's interest therein) that are used in determining whether all or substantially all of the corporation's assets are used in an active business for the purpose of the definition of small business corporation.

In the above situation, we have not been provided with sufficient information in order to establish whether an allowable business investment loss may arise. For instance, based on the information provided, it is unclear whether the corporation is a CCPC, whether you held the shares on account of capital, whether the shares have been disposed of, or deemed to have been disposed of, and whether the limited partnership ever carried on a business. If the partnership carried on a business, it is unclear whether such business was an "active business" and whether it was carried on in Canada.

If you require further assistance, you may contact your local tax services office.

We trust that our comments are of assistance to you.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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