7 June 1994 External T.I. 9409165 - LOSS ON PERSONAL GUARANTEE

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

What are the tax consequences of disposing of personal property to honour a guarantee and of honouring the guarantee?

Position TAKEN:

1.Application of the personal-use property rules.

2.Possibility of an ABIL.

Reasons FOR POSITION TAKEN:

1.The Act.

2.5-9351 and 7-4342

		5-940916
XXXXXXXXXX		L. Roy

June 7, 1994

Dear Sir\Madam:

Subject: Loss on Personal Guarantee

This is in reply to your letter of April 4, 1994 in which you requested our opinion regarding a loss incurred as a result of honouring a personal guarantee.

All references to statute are to the Income Tax Act S.C. 1970-71-72, c.63, as amended, consolidated to June 10, 1993 (the "Act").

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R2, dated September 28, 1990. This Directorate also provides technical interpretations of the various provisions of the Act but we do not provide tax planning advice. Where the particular transactions are completed, the enquiry should be addressed to the relevant district taxation office. The following comments are, therefore, of a general nature only, and are not binding on the Department.

The disposition of personal property in order to obtain the money required to honour a personal guarantee and the act of honouring the guarantee are two separate transactions. Generally, the disposition of personal property will give rise to tax consequences.

For the purposes of the Act, a boat is considered to be a personal-use property if it is owned primarily for the personal use or enjoyment of a taxpayer or someone related thereto. Where a taxpayer disposes of a personal use property, the resulting gain is a capital gain which must be reported in the taxpayer's income. However, if a loss results from the disposition, it is deemed to be nil and is therefore not deductible against income.

With regard to the act of honouring a guarantee of a corporation, it is the Department's view, as indicated in paragraph 4 of Interpretation Bulletin IT-239R2, that a taxpayer is considered to have acquired a debt at the time the guarantee is honoured for a cost equal to the payment made pursuant to the guarantee. Therefore, any repayment of such a debt by the corporation will not be taxable in the hands of the taxpayer.

However, where a debt becomes uncollectible in a taxation year, subsection 50(1) of the Act deems a debt to have been disposed of at the end of that year. Whether a debt is a "bad debt" subject to the provisions of subsection 50(1) of the Act is a question of fact which can only be determined upon an examination of all relevant facts. In this regard, paragraph 6 of Interpretation Bulletin IT-442R states that there are no specific conditions that must be met before a debt may be classed as a "bad debt". Such a decision should be made only after determined efforts to collect the debt have been unsuccessful or there is clear evidence to indicate that it has in fact become uncollectible.

A loss resulting from such a deemed disposition will be nil unless the debt was acquired for the purpose of gaining or producing income from a business or property. 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 therefore be deemed to be nil. However, it is the Department's practice to allow a loss on such a guarantee and not to treat it as being nil if certain conditions as described in paragraph 6 of IT-239R2 (copy enclosed) are satisfied.

Provided that the taxpayer's loss is not deemed to be nil, the loss may be an allowable business investment loss, three-quarters of which can be deducted against the taxpayer's income. In this respect, we are enclosing a copy of the Income Tax Guide on capital gains, as well as a copy of Interpretation Bulletin IT-484R, entitled Business Investment Loss.

We trust the above comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Rulings Directorate