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.
XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs,
RE: Paragraphs 39(1)(b) and (c) and Subsection 74.2(1) of the Income Tax Act ("the Act")
This is in reply to your letter of June 4, 1993 which requests clarification of the attribution rules found in subsection 74.2(1) of the Act in the following situation:
1. Mr. and Mrs. X are both jointly and severally liable for the debts of their operating corporation in which they both own shares.
2. The corporation has ceased permanently to carry on all operations and both Mr. and Mrs. X must now honour their guarantee.
3. To fund the guarantee liability, Mr. X proposes to sell marketable securities.
4. To take maximum advantage of the resulting allowable business investment loss (ABIL), Mr. X proposes to gift a portion of the proceeds from the sale of his marketable securities to Mrs. X, who will then use those proceeds to honour a portion of the guarantee.
You have asked that it be assumed that the payment of the guarantee is an ABIL to Mr. X. We interpret this to mean that Mr. X will realize an ABIL when he honours that portion of the guarantee that he pays directly with the proceeds from the sale of marketable securities.
Your question is whether an ABIL will be attributable to Mr. X when Mrs. X honours a portion of the guarantee with the gifted proceeds received from her spouse.
It is your view that subsection 74.2(1) of the Act has no application because only an allowable capital loss can be attributable under that subsection. You contend that, although under paragraph 39(1)(c) of the Act a taxpayer's business investment loss must first be a capital loss, the Act never refers to that particular capital loss as both an allowable business investment loss and an allowable capital loss. You have concluded that to state that a business investment loss can be both an allowable capital loss and an allowable business investment loss is incorrect.
It is our view that an allowable business investment loss is a type of allowable capital loss. The concept of the business investment loss simply permits certain allowable capital losses (allowable business investment losses) for a taxation year to be deducted from all types of income for that year. This position is reflected in Interpretation Bulletin IT-484R entitled "Business Investment Losses".
Paragraph 38(b) of the Act defines an allowable capital loss for a taxation year from the disposition of any property as "3/4 of (the) capital loss for the year from the disposition of that property". In turn, paragraph 39(1)(b) defines a taxpayer's "capital loss" for a taxation year from the disposition of any property as the
"loss for the year determined under this subdivision (to the extent of the amount thereof that would not, if section 3 were read in the manner described in paragraph (a) and without reference to the expression "or his allowable business investment loss for the year" in paragraph 3(d), be deductible in computing his income for the year or any other taxation year) from the disposition of any property of the taxpayer other than ...".
It is our opinion that this definition is inclusive of the losses described and found in paragraph 39(1)(c) of the Act, which paragraph defines a taxpayer's business investment loss. You have already noted that a business investment loss is a capital loss. Our interpretation states that not only is this true but that an allowable business investment loss is also an allowable capital loss albeit an allowable capital loss given special treatment under the provisions of the Act.
We believe that the wording found in subparagraph 3(b)(ii) of the Act supports this position.
Subparagraph 3(b)(ii) of the Act refers to an amount, if any, by which "allowable capital losses" for the year from dispositions of property other than listed personal property exceed "allowable business investment losses" for the year. We consider the reference to "allowable capital losses" to be inclusive of any amount that may qualify as an "allowable business investment loss". Any other interpretation, we believe, would negate the requirement found in the final clause of subparagraph 3(b)(ii) that removes the amount of any "allowable business investment losses" from the calculation.
Given our interpretation, we believe that in the hypothetical situation described above, the allowable capital loss realized by Mrs. X, if any, on honouring a portion of the guarantee will attribute to Mr. X.
Consistent with our comments above, it is our view that the reference to "the aggregate of the recipient's allowable capital losses" found in subparagraph 74.2(1)(a)(ii) of the Act incorporates all of the recipient's allowable capital losses including any in the nature of allowable business investment losses.
If it is established that the amount which attributes to Mr. X, if any, is an allowable capital loss which is deemed to be his, then whether or not Mr. X has an allowable capital loss that is an allowable business investment loss in the circumstances for the purposes of section 3 of the Act is determined from the relevant provisions of the Act governing such losses. Paragraph 38(c) of the Act defines a taxpayer's allowable business investment loss for a taxation year from the disposition of any property as "...3/4 of his business investment loss for the year from the disposition of that property"; paragraph 39(1)(c) of the Act describes a taxpayer's business investment loss for a taxation year from the disposition of any property, in part, as "...the amount, if any, by which his capital loss for the year from a disposition...".
Since the attribution rule in paragraph 74.2(1)(b) of the Act is only triggered at the point at which Mrs. X has determined that she has an allowable capital loss for the year from the disposition of the property, it cannot be said that Mrs. X's capital loss for the year on the disposition of that property is also deemed to be Mr. X's capital loss for the year on the disposition of that property. It follows that Mr. X cannot satisfy the requirement in paragraph 39(1)(c) of the Act since the capital loss on the disposition of the property is neither his nor deemed to be his.
We trust that the above comments are of assistance to you.
Yours truly,
P.D. Fuoco for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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