13 April 1987 Income Tax Severed Letter 5-2931 - [870413]

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.

XXXX

D. S. Delorey (613) 957-2116

April 13, 1987

Dear Madam

This is in reply to your letter of February 12, 1987 concerning the Department's practices set out in paragraph 8 of Interpretation Bulletin 1T-484 and paragraph 6 of Interpretation Bulletin IT-239R2 , as they relate to the following situation.

Numco and Opco are Canadian-controlled private corporations. Numco is owned by two married couples (X1, X2, Y1, Y2). The married couples are not related to each other. Each individual owns 25% of the issued capital of Numco. The two 50% shareholders of Opco are Numco and Z. Z is not related to the shareholders of Numco.

Opco obtained a loan from a bank, the proceeds from the Loan being used to produce income from business. The loan was guaranteed by X1, X2, Y1, Y2, Z and Numco, none of whom received consideration for the guarantee. Opco subsequently became bankrupt and the bank has called upon the guarantors to honour the loan.

You mention that where the requirements set out in paragraph 8 of IT-484 are met, a taxpayer's loss will be considered to be a business investment loss. One of these requirements is that the loss must be suffered as a result of honouring a guarantee in the circumstances outlined in paragraph 6 of IT-239R2 , one of which is that the debtor be either

(a) a Canadian corporation of which the guarantor is a shareholder, or

(b) a Canadian subsidiary of that corporation.

You ask if this requirement is met in the above described situation. In particular, you ask if Opco would be considered a subsidiary of Numco for the purposes of paragraph 6 of IT-239R2 .

It is our view that the word "subsidiary" in paragraph 6 of IT-239R2 takes on its normal meaning; i.e., a corporation in which another corporation owns at least a majority of the shares, and thus has control. Consequently, the above mentioned requirement would not be met by any of the shareholders of Numco.

We trust the above comments will be of assistance.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch