5 February 1990 External T.I. 59350 F - 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.

February 5, 1990

Dear Sirs:

Re:  Advance Income Tax Ruling Request

We are writing in reply to your letter of December 28, 1989 wherein you requested an advance income tax ruling regarding an allowable business investment loss ("ABIL") on behalf of investors in your corporation.

We must advise that we cannot consider your request for an advance income tax ruling in a situation such as this where the matter on which a determination is requested is primarily one of fact.  However, for your information, we are enclosing Interpretation Bulletins IT-484R: Business Investment Losses, IT-232R2: Non-Capital Losses, Net Capital Losses, Restricted Farm Losses, Farm Losses and Limited Partnership Losses - Their Composition and Deductibility in Computing Taxable Income, and IT-73R4: The Small Business Deduction - Income from an Active Business, a Specified Investment Business and a Personal Services Business.  In addition, as discussed with you, we are prepared to provide the following general comments which highlight the provisions of the Income Tax Act (the "Act") that appear to be most relevant to the situation you have described.  Accordingly, our comments do not include full description of all the provisions referred to.

Paragraph 3(d) of the Act provides for the deduction of an ABIL from other income in the year of the loss.  Any ABIL not deductible in the taxation year in which it arises may be carried back for 3 years and carried forward for up to 7 years and is deductible in computing taxable income in these years as a non-capital loss pursuant to clause 111(8)(b)(i)(A) and paragraph 111(1)(a) of the Act.  Any ABIL not utilized within this carry over period converts to a net capital loss and may be carried forward indefinitely to be applied against capital gains pursuant to clause 111(8)(a)(ii)(A) and paragraph 111(1)(b) of the Act.

In order to determine whether an ABIL may exist the following should be considered:

1.     Paragraph 38(c) of the Act provides that an individual's ABIL for 1989 from the disposition of any property is 2/3 of his business investment loss for the year from the disposition of that property.  The ABIL will increase to 3/4 of a business investment loss for 1990 and thereafter.  Similar calendar year rates are used to calculate the portion of a business investment loss qualifying as an ABIL for other taxpayers, however, proration for the number of days in the taxation year in each calendar year may be required.

2.     Paragraph 39(1)(c) of the Act then defines a taxpayer's business investment loss for a taxation year from the disposition of any property as the amount, if any, by which the capital loss for the year from the disposition after 1977

(i)      to which subsection 50(1) applies, or

(ii)      to a person with whom he was dealing at arm's length of any property, held as capital property, that is

(iii)        a share of the capital stock of a small business corporation, or

(iv)        a debt owing to the taxpayer by a small business corporation.

     Where an actual disposition does not take place, the provisions of section 50(1) must be considered.

3.     Pursuant to paragraph 50(1)(b) of the Act, a taxpayer shall be deemed to have disposed of a share at the end of the year and to have immediately reacquired it at a cost equal to nil where

(i)      the corporation has during the year become a bankrupt,

(ii)      the corporation is insolvent and a winding-up order under the Winding-Up Act has been made in the year, or

(iii)      the corporation ceased to carry on all of its businesses and was insolvent during the year, and

(A)     at the end of the year, the fair market value of the share is nil and it is reasonable to expect that the corporation will be dissolved or wound up and will not commence to carry on any business, and

(B)       the corporation did not commence to carry on any business in the year or within 24 months following the end of the year.

     Pursuant to paragraph 50(1)(a) of the Act, a taxpayer shall be deemed to have disposed of a debt owing to him at the end of the year and to have immediately reacquired it at a cost equal to nil where the debt is established to have become a bad debt during the year.

4.     In order to qualify as a business investment loss under paragraph 50(1) of the Act, the property disposed of must be the debt of or the shares of the capital stock of a small business corporation, defined in subsection 248(1) of the Act as a corporation that is a Canadian-controlled private corporation at least 90% of the fair market value of the assets of which were

(a)      used in a active business carried on primarily in Canada by the corporation or by a corporation related to it,

(b)      shares, bonds, debentures, bills, notes, mortgages, hypothec or similar obligations of another small business corporation that was connected with the corporation, or

(c)      a combination of (a) and (b).

     For the purposes of determining a taxpayer's business investment loss for paragraph 39(1)(c), the definition of small business corporation includes a corporation that was a small business corporation at any time in the 12 preceding months.

5.     Paragraph 125(7)(b) of the Act then defines a Canadian-controlled private corporation ("CCPC") as a private corporation, ie., a corporation that was not a public corporation or controlled by a public corporation or by one or more non-residents, that was incorporated in and resident in Canada.

6.     A small business corporation must carry on primarily in Canada an active business which under the definition in subsection 248(1) of the Act is a business other than a specified investment business or a personal services business.  A specified investment business is defined in paragraph 125(7)(e) as a business the principal purpose of which is to derive income from property including interest, dividends, rents or royalties, unless the corporation employs throughout the year more than five full-time employees.

As noted above, we are not in a position to comment on the tax implications of your financing arrangement as there are numerous determinations of fact to be made in making any comments.  Such determinations of fact are normally established following a review of all the circumstances after the transactions or events have taken place.  In commenting currently on the possible availability of an ABIL deduction in the future for an investor in the event of total loss, it appears to us that satisfaction of the conditions described in paragraph 3 and 6 above would be most crucial.  Before holding out any expectations for tax deductions, you should be satisfied that these two conditions in particular will be satisfied or that there is reasonable expectation that they will be satisfied.

We trust that our comments will be of assistance.

Yours truly,

R.E. Thompsonfor DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch