17 December 1996 Internal T.I. 9634547 - DISPOSITION OF EMPLOYMENT BONUS NOTES

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:

Deduction for loss on disposition of notes received from employer in lieu of cash bonus.

Position:

A capital loss will result.

Reasons:

The taxpayer had acquired a capital property when the notes were accepted in lieu of a bonus. Any loss from the disposition would result in a capital loss. The stop-loss rules do not apply since fair market interest were paid of the notes.

December 17, 1996

Mr. Jim Simpson Technical Review and

Client Services Division Remissions Section
Winnipeg Tax Services Office Jacques E. Grisé
957-2059
963454

Disposition of Employment
Bonus Notes Payable (EBNP)

This is in reply to your fax of October 22, 1996 requesting our opinion on a question raised by XXXXXXXXXX concerning the disposition of his EBNP. We apologize for the delay.

Briefly, XXXXXXXXXX had received the EBNP from his employer in the early XXXXXXXXXX in lieu of the cash bonuses due to him. An amount equal to the total of the face value of the EBNP plus the appropriate tax deductions remitted to our Department on the bonuses was included in XXXXXXXXXX income each year a bonus was paid. The annual interest paid to XXXXXXXXXX on the EBNP was reported by him as investment income. In XXXXXXXXXX sold his EBNP to his employer for XXXXXXXXXX% of the face value of the EBNP.

We share your view that the disposition of the EBNP will likely result in a capital loss. You may wish to assure yourself that XXXXXXXXXX has disposed of all his rights relating to his EBNP. If any rights remain, section 50 of the Income Tax Act (the Act) may have application to treat the loss as a capital loss with any recovery of the debt being a capital gain. In this respect, please refer to Interpretation Bulletin IT-159R2, Capital Debts Established to be Bad Debts. The stop-loss rules in paragraph 40(2)(g) of the Act do not apply since it seems that the EBNP were acquired by XXXXXXXXXX for the purpose of gaining or producing income from a property. Thus, the exception in subparagraph 40(2)(g)(ii) of the Act applies.

In his letter of August 27, 1996, XXXXXXXXXX suggests claiming the loss as an "employment loss". There seems to be no basis in subsection 8(1) of the Act for such a claim and a deduction for the loss would be denied by virtue of subsection 8(2) of the Act. XXXXXXXXXX situation may be compared to an employee who receives a cash bonus and decides to invest it in an interest-bearing note payable. If such an employee subsequently disposes of the interest-bearing note payable for less than the note's adjusted cost base, a capital loss would result.

Please call Jacques Grisé should you wish to discuss the above.

John F. Oulton
Section Chief
Business, Property and Personal Section
Business and Publications Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch