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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Recognition of an ABIL
Position: Question of Fact
Reasons: General comments provided.
XXXXXXXXXX 2002-014636
Karen Power, CA
(613) 957-8953
July 26, 2002
Dear XXXXXXXXXX:
Re: Business Investment Loss
This is in reply to your letter of June 6, 2002, requesting our comments regarding your ability to claim an allowable business investment loss ("ABIL") pursuant to paragraph 38(c) of the Income Tax Act (the "Act"). You describe a situation in which you invested $XXXXXXXXXX to purchase share capital of XXXXXXXXXX. You have indicated that XXXXXXXXXX is no longer in existence XXXXXXXXXX.
It is unclear from the information provided whether the shares of XXXXXXXXXX were ever issued. XXXXXXXXXX.
The Canada Customs and Revenue Agency's position on ABIL's is set out in Interpretation Bulletin IT-484R2 "Business Investment Losses" which has been enclosed for your information. 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.
An ABIL is defined in paragraph 38(c) of the Act as 1/2 of a "business investment loss". To qualify as a business investment loss, an amount must first be a capital loss. A gain or loss from the disposition of shares will be taxed as either an income gain or loss ("income account") or as a capital gain or loss ("capital account"). Whether gains or losses on the disposition of securities are on income account or on capital account is a determination of fact. The enclosed Interpretation Bulletin IT-479R "Transactions in Securities" lists some of the factors to be considered in making such a determination.
A taxpayer's business investment loss as defined in paragraph 39(1)(c) of the Act may arise from the disposition of a share of a corporation that is a small business corporation or from the disposition of a debt owing to the taxpayer by a Canadian-controlled private corporation. The disposition must be to an arm's length person or be deemed to have occurred under subsection 50(1) of the Act (as discussed below).
Where a debt is owed by a Canadian-controlled private corporation, the corporation must be:
? a small business corporation;
? a bankrupt (as defined by the Bankruptcy and Insolvency Act) that was a small business corporation when it last became a bankrupt; or
? a corporation referred to in section 6 of the Winding-up and Restructuring Act that was insolvent (within the meaning of that Act) and was a small business corporation at the time a winding-up order under that Act was made in respect of the corporation.
The term "small business corporation" is defined in subsection 248(1) of the Act. In general terms, a small business corporation, at a particular time, 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, at that time, is attributable to assets used principally in an active business carried on primarily in Canada by the corporation or a related corporation, to shares or debts of connected small business corporations, or to a combination of the two. In addition, for purposes of determining a business investment loss from a disposition, a small business corporation includes a corporation that was a small business corporation at any time in the 12 months before the disposition.
Subsection 50(1) deems a taxpayer to have disposed of a debt or a share of a corporation at the end of a taxation year for nil proceeds, this deemed disposition may in turn trigger a capital loss. Subsection 50(1) will apply to a debt or a share owned by the taxpayer at the end of the taxation year. In the case of a debt, it must have been established by the taxpayer to have become a bad debt in the year. In the case of a share, the corporation must:
? have become a bankrupt (as defined by the Bankruptcy and Insolvency Act) in the year;
? be a corporation referred to in section 6 of the Winding-up and Restructuring Act that was insolvent (within the meaning of that Act) and for which a winding-up order under that Act was made in the year; or
? at the end of the year, be insolvent, and neither the corporation, nor a corporation it controls, carries on business. Also, at that time, the share has a fair market value of nil and it is reasonable to expect that the corporation will be dissolved or wound up and will not commence to carry on business.
Whether a loss on a disposition of the above-noted shares or debt would qualify as a business investment loss is a question of fact that depends, inter alia, on the status of the corporation as a small business corporation at the time of disposition or in the preceding 12 months. Based on the limited information provided, we are unable to determine whether the corporation is a CCPC, whether you held shares or debt, whether the shares or debt were held on account of capital, and whether the corporation ever carried on an active business 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
- 3 -
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, 2002
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, 2002
Email this Content