10 July 1989 Internal T.I. 73847 F - Deduction from 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.

SUBJECT:  Deduction from Business Investment Loss Subsection 39(9)

This is in reply to your memorandum of April 21, 1989 concerning an apparent circularity problem involving subsection 39(9).

You described the following situation:

1986       The taxpayer claims a capital gains deduction of $10,000 under subsection 110.6(3).

1988     The taxpayer has a capital loss of $100,000 which qualifies as a Business Investment Loss (B.I.L.). 

     Pursuant to subsection 39(9), in computing the B.I.L. for the year the taxpayer shall deduct the lesser of

(i)     his business investment loss for the year and

(ii)      twice the amount of his capital gains deductions claimed in 1985 to 1987.

Therefore the taxpayer will deduct $20,000 ($10,000 x 2) resulting in a B.I.L. of $80,000 ($100,000 - $20,000) and an Allowable Business Investment Loss (A.B.I.L.) of $40,000.  The $20,000 reduction in B.I.L. under subsection 39(9) will be a capital loss of the taxpayer for the year available for carry back or forward.

Problem

The taxpayer requests a capital loss carry back from 1988 to 1986 resulting in a reduction of the capital gains deduction in 1986 to nil.  It is your opinion that the amount of the B.I.L. for 1988 must be recalculated as there would be no deduction under subsection 39(9) in respect of the 1986 capital gains deduction.  The B.I.L. for 1988 would therefore be $100,000 resulting in no capital loss amount for carry back and the circle begins.

Our Views

We agree that if the B.I.L. for 1988 is to be recalculated in the manner you described, we would have a circularity problem and subsection 39(9) would be reduced to futility.

Numerous court decisions have established guidelines respecting the interpretation of statutes.  One of these guidelines is that a statute is not to be interpreted so as to reduce any provision to futility.  Consequently we should endeavour to interpret subsection 39(9) and paragraph 39(1)(c) in such a manner as to avoid the circularity problem.

The Technical Notes issued by the Department of Finance in November, 1985 indicate that the intent of subparagraph 39(1)(c)(viii) is to reduce the amount of a taxpayer's B.I.L. in a taxation year where he has a capital gains exemption in a previous year.  The amount of the reduction is determined under subsection 39(9).  The A.B.I.L. is deducted by the taxpayer under paragraph 3(d) in computing income for the year.  The reduction determined under subsection 39(9) is considered a capital loss which the taxpayer may deal with as permitted under the Act.  If the taxpayer chooses to carry back the capital loss to a prior year thereby reducing the capital gain exemption in the prior year to nil, there is no requirement in paragraph 39(1)(c) to recalculate the B.I.L. for the current year. If we do not recalculate the B.I.L. we do not have a circularity problem.  In effect, the taxpayer in your example is left with the choice, in 1988, of having $10,000 in net capital loss or $10,000 in refreshed capital gains exemption.  In either case, the A.B.I.L. in 1988 is $40,000, which is in accordance with the intention of the legislation as described in the Technical Notes.

We might also point out that where a capital loss is carried back to a prior taxation year the taxpayer may be liable for interest pursuant to subsection 161(7).

We trust our comments will be of assistance to you.

B.W. DathDirectorSmall Business and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch