17 April 2012 External T.I. 2012-0441591E5 - Allowable Business Investment Loss

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 the loss incurred on corporation shares due to insolvency is an allowable business investment loss.

Position: Question of fact.

Reasons: General comments provided.

XXXXXXXXXX
					2012-044159
					Charles Rafuse
					613-247-9237
April 17, 2012

Dear XXXXXXXXXX :

Re: Allowable Business Investment Loss

This is in response to your email of March 28, 2012, concerning the interpretation of an allowable business investment loss ("ABIL") pursuant to paragraph 38(c) of the Income Tax Act (the "Act").

In particular, you have indicated that a XXXXXXXXXX corporation purchased the shares of XXXXXXXXXX personal corporations, which were carrying on the XXXXXXXXXX as parties of a XXXXXXXXXX Limited Liability Partnership, to obtain and retain the client list of those corporations. It is not known if the individuals who previously owned the XXXXXXXXXX corporations claimed the capital gains exemption on the sale. Since the XXXXXXXXXX acquired corporations are no longer active and are insolvent, you have asked if the capital loss on the shares would be considered to be an ABIL.

Our Comments

An ABIL is defined in paragraph 38(c) of the Act as 1/2 of a "business investment loss" ("BIL"). In order for a taxpayer's capital loss from a property that is a share to qualify as a BIL, as defined in paragraph 39(1)(c) of the Act, it must arise from the disposition of a share of a corporation that is a "small business corporation" ("SBC"). The disposition must be to an arm's length person or be a deemed disposition pursuant to an election under subsection 50(1) of the Act. The term SBC is defined in subsection 248(1) of the Act. In general terms, an SBC, at a particular time, is a "Canadian-controlled private corporation" ("CCPC") all or substantially all 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 SBCs, or to a combination of the two. In addition, for purposes of determining a BIL from a disposition, an SBC includes a corporation that was an SBC at any time in the 12 months before the disposition.

Subsection 248(1) of the Act also defines "active business" as: "in relation to any business carried on by a taxpayer resident in Canada, means any business carried on by the taxpayer other than a specified investment business or a personal services business". Please refer to the Interpretation Bulletin IT-73R5, The Small Business Deduction, for more information on "specified investment business" and "personal services business".

Whether a capital loss on a disposition of the shares would qualify as a BIL under paragraph 39(1)(c) of the Act is a question of fact that depends, inter alia, on the status of the corporation as a SBC at the time of disposition or in the preceding 12 months. Based on the limited information you have provided, we are unable to determine whether the corporations were SBCs.

More information on this topic, as well as an explanation of the meaning of a SBC and CCPC, is available in IT-484R2, Business Investment Losses, which along with IT-73R5 may be obtained from our website at www.cra-arc.gc.ca.

We trust that these comments will be of assistance.

Yours truly

Michael Cooke
Manager
Capital Transactions Section
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch