28 August 1996 External T.I. 9621015 - ATTRIBUTION OF 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.

Principal Issues:

1) whether attribution applies
2) if attribution applies, would spouse to whom the income/loss attributes be eligible for ABIL treatment

Position TAKEN:

1) attribution would appear to be applicable

2) 74.2(1) attributes allowable capital loss of transferee to transferor, not the ABIL which is a specific type of ACL. Whether or not transferor is eligible for ABIL deduction is if the ACL meets the definition of the ABIL purusant to 38(1), 39(1)(c). From the information provided, he would not qualify for this ABIL treatment, only the ACL.

Reasons FOR POSITION TAKEN:

Departmental position. see 5-7383 and 931818

									962101
XXXXXXXXXX							D. Zion

Attention: XXXXXXXXXX

August 26, 1996

Dear Sirs:

Re: Attribution of an Allowable Business Investment Loss (ABIL)

This is in reply to you letter of May 29, 1996, in which you request our opinion regarding your client's tax affairs. More specifically, you have requested confirmation that, in the circumstances under review, your client should be allowed to claim his spouse's ABIL against his income for the taxation years in question.

In the situation you describe, funds have been provided by one spouse ("Mr. X") to the other spouse ("Mrs. X") for the purpose of investing in a corporation. In exchange for this investment, Mrs. X is issued shares by the corporation. As a result of the corporation's poor business performance, it was necessary for Mrs. X, with funds provided by Mr. X, to honour her guarantee in respect of a number of the corporation's debts.

As discussed in our telephone conversations (Zion/XXXXXXXXXX), confirmation of the tax consequences of specific transactions is only given by this Directorate by way of an advance tax ruling and is restricted to proposed transactions. As explained in Information Circular IC 70-6R, "Advance Income Tax Rulings" dated September 28, 1990 and Special Release thereto dated September 30, 1992, it is not our practice to issue advance income tax rulings in respect of transactions that are already in progress or a question of fact. The determination of the tax consequences of a particular fact situation is normally the responsibility of the Tax Services office serving the area in which the client resides. However, we are prepared to offer the following general comments which we hope will be of assistance to you.

For the purposes of our discussion, we have based our comments on the premise that the attribution rules are applicable under the circumstances. We have also assumed that the conditions discussed in paragraph 6 of IT-239R2 have been met so that the loss in question would have been an ABIL to Mrs. X had she acquired the debt with her own funds. Pursuant to paragraph 74.2(1) of the Income Tax Act (the "Act") the allowable capital loss realized by Mrs. X upon honouring the guarantee will attribute to Mr. X. 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. Consequently, it is Mrs. X's allowable capital loss which is attributed to Mr. X, not an allowable business investment loss. The extent to which Mr. X can utilize such an allowable capital loss in determining his income for the year is set out in section 3 of the Act. Paragraph 3(b) of the Act allows Mr. X to reduce, to the extent possible, the aggregate of his taxable capital gains and taxable net gains by the amount of his allowable capital losses net of his allowable business investment losses. It is important to note from the wording of subparagraph 3(b)(ii) of the Act that an allowable business investment loss must first be an allowable capital loss. Assuming that Mr. X still has income after the computation in paragraph 3(c) of the Act, he may further reduce his income by his allowable business investment loss of the year.

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...". The application of the attribution rule in paragraph 74.2(1)(b) of the Act is triggered only at the point where Mrs. X has determined, under the provisions just referred to, that she has an allowable capital loss for the year from the disposition of the property. You will note that subsection 74.2(2) provides that, for the specific purposes of section 110.6, the disposition of property giving rise to a capital gain or loss in the hands of the transferee is deemed to be a disposition of property by the transferor, thereby allowing the transferor to utilize the capital gains exemption provisions that would otherwise only be available to the individual that actually disposes of the property.

There is no provision similar to subsection 74.2(2) of the Act affecting ABILs. Consequently, it cannot be said that the disposition of the property that gave rise to Mrs. X's capital loss for the year is deemed to be a disposition of that property by Mr. X, for the purposes of paragraph 39(1)(c) of the Act. In other words, Mr. X acquired the capital loss by attribution and not as a result of the disposition of property. It follows that Mr. X cannot satisfy the requirement in paragraph 39(1)(c) of the Act because the capital loss on the disposition of the property is neither his nor deemed to be his.

We trust our comments will be of assistance to you.

Yours truly,

J.A. Szeszycki
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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