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.
October 7, 1992
Toronto District OfficeEnquiries and Office ExaminationTax Seminar
October 14 and 15, 1992
Question 2. (North York District Office)
Whether a loan to a small business corporation can be established as a bad debt by an individual under paragraph 50(1)(a) of the Income Tax Act when:
(1) interest is continually received on this loan; and
(2) a bank has called the other loans of this corporation.
Answer:
Paragraph 10 of Interpretation Bulletin IT-159R3 sets out the Department's position in this matter quite clearly. It states "The time at which a debt becomes a bad debt is a question of fact and any decision made must be dependent upon the circumstances in each case." Thus, it is a judgement call in almost every case, as demonstrated by the three cases included as references with your question. The Act, itself, in paragraph 50(1)(a) uses the words, "where a debt owing to a taxpayer at the end of a taxation year .... is established by him to have become a bad debt in the year", when setting out the rules for deeming the taxpayer to have disposed of a debt.
Even though the Department has set out some positive views on when a debt can be considered a bad debt in IT-159R3 and IT-442R, the position is taken in paragraph 6 of IT-442R that "there are no specific conditions that must be met before a debt may be classed as a bad debt." It is up to the taxpayer to establish that a particular debt is a bad debt in the year.
In the present instance it would appear that the taxpayer has a prima facie case for claiming a reserve for bad debts. Although interest is still being received on a regular basis, there are reasonable grounds to feel that the capital is at risk in view of the fact that the bank has called all other loans of the debtor corporation. However, there does not appear to be a bad debt as yet.
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