19 February 1990 Ruling 59351 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 19, 1990

Dear Sirs:

Re:  Allowable Business Investment Loss

This is in reply to your letter of September 29, 1989 concerning "allowable business investment losses" in relation to paragraph 39(1)(c) of the Income Tax Act (the "Act").

In your letter you have referred to a situation in which a taxpayer is required to honour the guarantee of his corporation's debt.  You specifically ask if the corporation has to be a small business corporation within 12 months of actually paying the guaranteed loan or simply within 12 months of the time the corporation is bankrupt.

Our Comments

It is the Department's view, as indicated in paragraph 4 of IT-239R2, that a taxpayer is considered to have acquired the debt at the time the guarantee is honoured (paid) rather than at the time he becomes aware of his obligation to honour it. In the year of payment, he will have acquired the debt at a cost equal to the payment made pursuant to the guarantee. If the debt is uncollectible in the year of payment, the taxpayer would have disposed of the debt by virtue of subsection 50(1) of the Act at the end of the year. If a capital loss was incurred, it is our view that the corporation, for the purposes of subparagraph 39(1)(c)(iv), must have been a "small business corporation" pursuant to the definition of the definition of this term in subsection 248(1) of the Act within twelve months of the end of the taxation year in which the capital loss was incurred.

It should be noted that where a shareholder has guaranteed the debts of his corporation for no consideration, the guarantee will generally be considered not to have been given for the purpose of gaining or producing income. Any loss from such a guarantee will be deemed to be nil by virtue of subparagraph 40(2)(g)(ii) of the Act.  However, it is the Departments' practice to allow a loss on such a guarantee and not to treat it as being nil by virtue of subparagraph 40(2)(g)(ii) of the Act if certain conditions as described in paragraph 6 of IT-239R2 are satisfied.

You have also asked us whether legal fees incurred by a shareholder to defend himself against having to honour a personal guarantee would increase the amount of any loss. In this regard, it is our general view that such fees would not form a part of any capital loss or allowable business investment loss as they are not incurred as result of a disposition of capital property. They are in fact personal expenses of the taxpayer and are not in any way paid in respect of his corporation.

We apologize for the delay in replying.

Yours truly,

for DirectorBusiness and General Division Specialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch