16 July 1986 Income Tax Severed Letter 7-0524 - [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.

July 16, 1986

Specialty Rulings Directorate A.G. Thornley (613)957-2130 RE: Allowable Business Investment Loss (ABIL)

XXXX

You have asked for our assistance in explaining why paragraph 6 of IT-239R2 does not allow XXXX a deduction pursuant to subparagraph 40(2)(g)(ii) of the Act.

Our Comments

The Department's position continues to be as stated in paragraph 3 of IT-239R2

that a capital loss arising from honouring a guarantee given for inadequate or for no consideration is nil by virtue of subparagraph 40(2)(g)(ii) of the Act. Jurisprudence supports this view (see Canada Safeway Ltd. v. MNR 57 DTC 1239 and DWS Corporation v. MNR 68 DTC 5045) as the Supreme Court of Canada has given a narrow interpretation to the words "for the purpose of gaining or producing income from a business or property".

The Department has, however, adopted the position with respect to Canadian corporations of which the taxpayer is a shareholder that it will allow a loss as stated in paragraph 6 of IT-239R2 where certain conditions are met. Although there is nothing in the Act or in the court cases which supports taking this relaxed position, it was taken in view of the fact that small corporations are often able to obtain bank financing only where the debt is guaranteed by a shareholder or partner. The above noted administrative position is also extended to the subsidiary of a Canadian corporation of which the taxpayer is a shareholder. It should be noted that "subsidiary" in this context is defined in paragraph 5 of IT-239R2 to be a subsidiary "controlled" corporation. The Department has stated in recent correspondence that it is not prepared to broaden the administrative position set out in paragraph 6 of IT-239R2 . Thus, it is not prepared to permit the deduction of losses in circumstances similar to those described above that is, where the loss arises on the guaranteeing of a loan of a non-subsidiary corporation.

We trust the above will be of assistance.

for Director Reorganizations and Non-Resident Division

Specialty Rulings Directorate Legislative and Intergovernmental

Affairs Branch