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:
Loss on shareholder loans
Position:
refer to IT-239R2 and 159R3
Reasons:
proposed transactions re:fact situation - general comments only
971149
XXXXXXXXXX S.Tevlin
May 5, 1997
Dear Madam:
Re: Request for Technical Interpretation
We are writing in response to your letter dated April 30, 1997 and in this regard we offer the following comments.
As your letter describes an actual fact situation and proposed transactions your request should take the form of a request for an advance income tax ruling, submitted in the manner set out in Information Circular 70-6R3 dated December 30, 1996. As expressed in paragraph 6 of the Information Circular, the Department will not express opinions on definite transactions that are being proposed other than by way of an advance income tax ruling, nor will the Department provide rulings on completed transactions. However, we are prepared to provide you with the following general comments.
According to paragraph 2 of Interpretation Bulletin IT-159R3 (copy attached), under paragraph 40(2)(g)(ii) of the Income Tax Act (the "Act"), a taxpayer's loss arising from the disposition of a debt is nil unless the debt was acquired by the taxpayer for the purpose of gaining or producing income from a business or property. As indicated in paragraph 5 of Interpretation Bulletin IT-239R2 (copy attached), money which has been loaned at a reasonable rate of interest generally constitutes a debt acquired for the purpose of gaining or producing income, and any capital loss which arises because it has become uncollectible is generally not deemed to be nil by virtue of subparagraph 40(2)(g)(ii) of the Act. It is the Department's view that money has not been loaned at a reasonable rate of interest where a taxpayer borrows money at interest and loans that money to a corporation of which he or she is a shareholder at a lesser rate of interest than that at which the taxpayer borrows the money. However, in such circumstances, the loss arising to the taxpayer from the corporation's inability to discharge its obligations to him or her may be a deductible capital loss if the conditions set out in paragraph 6 of IT-239R2 are satisfied.
A capital loss arising from the disposition of a debt that has become a bad debt may qualify as a business investment loss within the meaning of paragraph 39(1)(c) of the Act if the debt that generated the loss was owed to the taxpayer by a small business corporation and if the disposition of the debt was either to a person with whom the taxpayer was dealing at arm's length or one to which subsection 50(1) of the Act applies. Subsection 50(1) of the Act deems a debt which has become a bad debt in a taxation year to have been disposed of at the end of the year. Whether a corporation is a small business corporation and the time at which a debt becomes a bad debt are questions of fact. Paragraph 10 of IT-159R3 states that, generally, a debt will be uncollectible at the end of a particular taxation year if the creditor has exhausted all legal means of collecting it or the debtor has become insolvent and has no means of paying it.
In addition, paragraphs 4 and 6 of IT-239R2 discuss the situation where a shareholder is required to honour a guarantee.
The forgoing comments are given in accordance with the practice referred to in paragraph 22 of Information Circular 70-6R3 and are not binding on Revenue Canada, Taxation.
Yours truly,
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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