6 October 1995 APFF Roundtable Q. 43, 9522580 - ALLOWABLE BUSINESS INVESTMENT LOSS (ABIL)

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.

APFF - 1995

Question 43

Business investment losses

An individual owns all the shares in a corporation that will be insolvent as of November 30, 1995. At a point in 1995, the corporation owned assets used in an active business in Canada, the fair market value of which represented 90% or more of the fair market value of the assets of the corporation.

1. If the corporation is wound-up before the end of the 1995 calendar year, does the Department consider that subsection 84(9) of the Income Tax Act (“the Act”) will apply? Will the shareholder be able to claim a business investment loss under subparagraph 39(1)(c)(ii) of the Act in his 1995 tax year?

2. Is the Department of the view that the shareholder must make an election under subparagraph 50(1)(b)(iii) of the Act with respect to the shares of the corporation in its return of income for 1995 in order to obtain a business investment loss and not wind-up the corporation until January 1996? In such cases, would this type of planning be subject to subsection 245(2) of the Act?

3. If subsection 84(9) of the Act does not apply on a winding-up, does the Department of Finance intend to make amendments to subsections 69(5) and 84(9) of the Act to correct the apparent technical inequity?

Answer by the Department of Revenue

1. As indicated in paragraph 9 of Interpretation Bulletin IT-126R2, the Department’s position in cases where a corporation is wound up is that the shares are cancelled when the certificate of dissolution is issued. Also, even if the official dissolution of a corporation does not take place, the Department will consider that there has been a disposition of the shares when subsection 88(1) or (2) applies to the corporation under the circumstances described in paragraph 5 of the above-mentioned interpretation bulletin.

Under subsection 84(9) of the Act, a shareholder who disposes of a share as a result of the redemption, acquisition or cancellation of a share by a corporation is deemed to have disposed of the share to the corporation.

Subsection 84(9) would apply if the corporation is dissolved voluntarily. Subsection 84(9) of the Act would also generally apply to an involuntary dissolution because, as indicated in paragraph 11 of Interpretation Bulletin IT-444R, the shares of a corporation that was involuntarily dissolved are considered to have been cancelled by the dissolution.

Subparagraph 39(1)(c)(ii) of the Act would therefore not apply in this situation because the shareholder would have disposed of his shares to a person, the corporation, with which he did not deal at arm’s length.

2. If the corporation is insolvent at December 31, 1995 and all the other conditions set out in subparagraph 50(1)(b)(iii) have been met, the individual could make an election in his income-tax return for 1995 to have subsection 50(1) apply to each share. If all the other requirements listed in paragraph 39(1)(c) have been met, the individual would be authorized to treat the capital loss realized as a business investment loss.

We cannot make a definitive ruling on the application of subsection 245(2) of the Act without examining all the facts and circumstances surrounding the transactions. If there were no additional facts or circumstances surrounding the transactions, we are however of the view that subsection 245(2) of the Act would not generally apply.