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: Losses incurred on loans to controlled subsidiary - can the parent make a claim under 20(1)(l) rather than ss 50(1) in order to avoid the application of para 40(2)(g)(ii) and section 80
Position: Must be in the business of lending money - question of fact
Reasons: Paragraph 20(1)(l) only applicable to money lenders
October 14, 1998
WINNIPEG TAX SERVICES OFFICE HEADQUARTERS
Henry Zerbin J.P. Dunn
Business Enquiries (613) 957-2747
Debt Parking - Subsections 50(1) and 80.01 (8) of the Income Tax Act
We are writing in reference to your correspondence of October 10, 1997 with which you had enclosed a letter from XXXXXXXXXX, regarding the application of subsections 50(1) and 80.01(8) of the Income Tax Act (the "Act") to a particular situation described in his letter. We apologize for the lengthy delay in responding to your letter, however certain fundamental policy concerns were required to be addressed prior to formulating our response.
In the situation described, a parent corporation is owed an amount comprised of non-interest bearing advances made to its wholly-owned subsidiary corporation. As we understand, the subsidiary is unable to repay these advances. As noted by the writer of the letter, a claim by the parent for an allowable business investment loss is not available by virtue of subparagraph 39(1)(c)(iv) of the Act in that the advances were made to a party with which the parent corporation does not deal at arm's length.
In the event that the parent elects to have the provisions of subsection 50(1) of the Act apply, the parent will be deemed to have disposed of the debt for proceeds of disposition equal to nil and to have reacquired it at that same amount. As noted by the writer, subparagraph 40(2)(g)(ii) of the Act will deem the loss incurred by the parent to be nil to the extent that the loan was not made for the purpose of gaining or producing income from a business or property.
Further, because of the election by the parent pursuant to subsection 50(1) of the Act, subsection 80.01(7) will consider the obligation to have become a "parked obligation" at the time of the election for the purpose of, in the present case, subsection 80.01(8) of the Act. Because the "specified cost" of the debt to the parent corporation will be nil subsequent to the election pursuant to subsection 50(1) of the Act, subsection 80.01(8) will consider the debt to have been "settled" at that amount (nil) with the attendant consequences prescribed by paragraph 80(2)(e) of the Act. Accordingly, in circumstances in which the advances were made for the purpose of earning income from a business or property and the parent elects pursuant to subsection 50(1) of the Act, the loss will not be denied to the parent corporation but the provisions of section 80 will be applicable to the subsidiary corporation. In the event that the advances were not made for the purpose of earning income from a business or property, no loss would be available to the parent because of subparagraph 40(2)(g)(ii) while section 80 would still be applicable to the subsidiary.
The determination of whether advances such as those described were made "for the purpose of earning income from a business or property" as required by subparagraph 40(2)(g)(ii) of the Act is discussed in paragraphs 3,4 and 5 of Interpretation Bulletin IT- 239R2. Further, paragraphs 6 and 7 of that bulletin describe circumstances in which the Department would not consider a loss on a loan to be nil by virtue of paragraph 40(2)(g)(ii) notwithstanding that the funds were loaned at no, or less than a reasonable rate of, interest.
We also understand that the writer may wish to assert that the advances were made as part of an adventure in the nature of trade such that a bad debt reserve pursuant to paragraph 20(1)(l) of the Act may be claimed by the parent corporation with respect to the outstanding amounts. The result of such a claim would be that the parent corporation effectively claims a loss with respect to the loan while section 80 would not necessarily be applicable to the subsidiary corporation. In this respect, we would note that the determination of whether the advances were made in the course of carrying on a money-lending business would be dependent upon an analysis of all of the facts and circumstances concerning the activities of the parent corporation. The Courts have, generally, found that a corporation is not considered to be in the business of lending money where it makes loans only to subsidiary corporations and does not hold itself out to the general public as a money lender. Moreover, if it is found that the parent corporation does, in fact, carry on such money-lending activities, advances made to a subsidiary corporation which could be considered to constitute permanent capitalization of that subsidiary may be considered to be on account of capital and outside the scope of the parent's money-lending activities such that a bad debt reserve in respect of those amounts would not be available. Again, such a determination would depend upon a full examination of the pertinent facts.
We trust that this is the information which you require.
Financial Industries Division
Income Tax Rulings and
Policy and Legislation Branch
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