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.
Principal Issues: Whether a taxpayer can adjust past income tax returns to claim an interest expense deduction and a capital loss on a debt (personal line of credit).
Position: Representative was referred to TSO.
Reasons: Situation involved completed transactions with a request for adjustments to previously assessed income tax returns.
XXXXXXXXXX Tim Fitzgerald, CGA
2007-022632
August 2, 2007
Dear XXXXXXXXXX:
Re: Capital loss
We are responding to your correspondence of March 3, 2007 concerning a capital loss on a debt. We apologize for the delay in responding to you.
As we understand it, the taxpayer's spouse, (Mrs. A) acquired shares in a corporation, the purchase of which was financed with funds drawn from the taxpayer's (Mr. A's) personal bank line of credit secured by their matrimonial home. After a few years of operation, in 2005, the business of the corporation failed and the corporation became insolvent.
You would like know if Mr. A's income tax returns can be adjusted to claim an income deduction for the interest expense in respect of the line of credit and if Mr. A's 2005 T1 personal income tax return can be adjusted to claim a capital loss in connection with the funds drawn from his personal bank line of credit and used by his spouse to finance her acquisition of shares in the corporation.
The particular situation outlined in your letter appears to relate to a factual one involving specific taxpayers and completed transactions. Moreover, you are requesting to adjust a specific taxpayer's previously assessed income tax returns. As indicated in paragraph 22 of IC 70-6R5, Advance Income Tax Rulings, the Canada Revenue Agency's (CRA) tax services offices consider requests for written interpretations on completed transactions and provide over-the-counter advice and assistance on general matters. Accordingly, you should submit all relevant facts and documentation to the local tax services office for their views and consideration regarding your requested adjustments.
Generally, interest on a debt is deductible in computing income for tax purposes if the borrowed funds are used for the purpose of earning income from business or property and are not used for personal purposes. Generally, a capital loss on a disposition or deemed disposition of a debt is recognized for tax purposes if the debt was incurred for an income earning purpose. Generally, if a debt was not incurred for the purpose of earning income, a capital loss realized as a result of the debt becoming a bad debt is deemed to be nil, pursuant to paragraph 40(2)(g) of the Income Tax Act. In any given situation it is a question of fact whether money was borrowed by a taxpayer for personal purposes or for an income earning purpose.
For information on capital losses and the deductibility of interest, you may wish to consult the CRA publications, Guide T4037 Capital Gains and interpretation bulletins IT-484R2 Business Investment Losses and IT-533 Interest Deductibility and Related Issues.
We would also like to mention that the Act contains attribution rules, which are generally designed to prevent a taxpayer from splitting income with the taxpayer's spouse or common-law partner (or related minor). Under these rules and subject to certain exceptions, where a taxpayer transfers or lends property (including money) to a transferee, such as a spouse or common-law partner, the transferee's income or loss from the property or from property substituted therefor and the transferee's taxable capital gain or allowable capital loss from the disposition of the property or property substituted therefor are attributed to the transferor. The attribution rules are discussed in detail in IT-511R, Interspousal and Certain Other Transfers and Loans of Property, and IT-510, Transfers and Loans of Property Made after May 2, 1985, to a Related Minor.
The above publications may be viewed by visiting the CRA website at http://www.cra-arc.gc.ca.
We trust this information will be of assistance.
Yours truly,
Sandy Parnanzone
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch
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