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:
For purposes of the business investment loss rules, does the Canadian-controlled private corporation" ("CCPC") (defined in subsection 125(7) of the Act) have to qualify as an SBC within 12 months of the deemed disposition under 50(1) of the Act or within 12 months of the time specified in clause 39(1)(c)(iv)(B) or (C) of the Act, as the case may be?
Position:
Within 12 months of the time specified in clause 39(1)(c)(iv)(B) or (C), as the case may be.
Reasons:
That is why clauses 39(1)(c)(iv)(B) and (C) were introduced. The interaction of these two provisions with the definition of SBC in subsection 248(1) of the Act (which states "for the purpose of paragraph 39(1)(c), a corporation that was at any time in the 12 months preceding that time a small business corporation") provides more flexibility for certain bankrupts and insolvent corporations to meet the 12 month test.
November 5, 1998
Winnipeg Tax Services Office HEADQUARTERS
Heather Kay M. Eisner
Office Audit (613) 957-2138
980994
Business Investment Losses
This is in reply to your enquiry of April 14, 1998, sent by MS Mail, in which you asked us for our views on two situations concerning the above-noted subject. We also acknowledge our telephone conversations on July 10, 1998 and July 14, 1998 (Eisner/Kay) in which we obtained clarification with respect to your concerns. We note that you also sent in a memorandum on March 12, 1998 concerning other issues with respect to business investment losses. Your March 12th memorandum was assigned control #980623 and will be the subject of a separate reply. We apologize for the delay in replying.
Situation 1
In the first situation, a corporation (the "Corporation"), that is a Canadian-controlled private corporation ("CCPC"), as defined in subsection 125(7) of the Income Tax Act (the "Act"), ceased to operate on November 30, 1995. The Corporation was in financial difficulty at that time, however, its outstanding debt to its shareholder was not considered a bad debt at any time in 1995, pursuant to the guidelines set out in paragraph 10 of Interpretation Bulletin IT-159R3. The Corporation filed for bankruptcy in 1996 and was declared a bankrupt in March of that year.
You have referred to the definition of "small business corporation" ("SBC") in subsection 248(1) of the Act, which provides that an SBC includes "for the purposes of paragraph 39(1)(c), a corporation that was at any time in the 12 months preceding that time a small business corporation". In brief, you are concerned that upon the application of paragraph 50(1)(a) of the Act, a deemed disposition of the bad debt would not take place until December 31, 1996 and the 12 month test with respect to the SBC definition would not be met because the corporation ceased carrying on its active business on November 30, 1995.
A debt owing to the taxpayer by a CCPC that has been disposed of in accordance with either subparagraph 39(1)(c)(i) or (ii) of the Act will qualify as a business investment loss if one of the conditions in clause 39(1)(c)(iv)(A) to (C) of the Act is present. Clause 39(1)(c)(iv)(B) of the Act refers to a CCPC that is a bankrupt that was a SBC at the time it last became a bankrupt. As a consequence of the 12 month rule in the definition of SBC in subsection 248(1) of the Act, the Corporation must have been an SBC within 12 months of becoming a bankrupt.
The concern you have raised is the reason subparagraph 39(1)(c)(iv) of the Act was amended under Bill C-18, applicable to the 1987 and subsequent taxation years. The 1991 technical notes from the Department of Finance reads as follows:
"The amendment to subparagraph 39(1)(c)(iv), which applies to the 1987 and subsequent years, extends, in certain circumstances, the application of paragraph 39(1)(c) to capital losses on disposition of debts of corporations that have ceased to qualify as small business corporations. Where the corporation was a small business corporation when it became a bankrupt or when a winding-up order was made, by reason of the corporation's insolvency, in respect of it under the Winding-up Act, any capital loss realized by the taxpayer on a disposition of a debt of the corporation will be eligible for treatment as a business investment loss."
In scenario 1, we have not been provided with enough information to determine if the debt had been disposed of under the conditions described in either subparagraph 39(1)(c)(i) or (ii) of the Act. For example, if the debt had been settled or cancelled sometime after the Corporation became a bankrupt but before the end of 1996, then paragraph 50(1)(a) of the Act would not apply. Furthermore, we have not been provided with any information regarding whether the shareholder dealt at arm's length with the Corporation. For further comments on this issue, please see our comments on situation 2 as well as our comments made in File #980623.
Situation 2
In this situation, a shareholder (the "Shareholder"), who is an individual, decided that his corporation (the "Corporation") would cease to carry on its business operation as a result of the Shareholder's medical problems. All of the business assets of the corporation had been sold by the end of August, 1993, however, the corporation did not wind up as it was the intention of the Shareholder that the corporation would commence to carry on a business at some future time. The corporation did not repay an outstanding shareholder loan at that time. In January of 1995, the Shareholder realized that this would not occur and claimed a business investment loss, as determined under paragraph 39(1)(c) of the Act, in 1995 in respect of the loan.
While the Winnipeg Tax Services Office disallowed the loss as the corporation was not a SBC within 12 months of the deemed disposition under subsection 50(1) of the Act, you have asked for our comments.
The time at which a debt becomes a bad debt is a question of fact. We have not been provided the necessary information to make such a determination. It would appear that the taxpayer has made an election under paragraph 50(1)(a) of the Act with respect to the 1995 taxation year. It is not clear to us, based on the information provided, why an election under subsection 50(1) of the Act was necessary. For example, if there were no assets remaining in the corporation when it ceased to carry on its business on
August 30, 1993, and the whole amount of the debt was determined to be uncollectible at that time in accordance with the guidelines described in paragraph 10 of Interpretation Bulletin IT-159R3, then the debt would have been deemed to be disposed of at the end of 1993 in accordance with paragraph 50(1)(a) of the Act as it applied at that time (i.e. for the 1993 taxation year, it was not an elective provision). In the event the debt was not considered bad at the end of 1993 and the corporation wound-up in January 1995, then we would assume that the debt had been settled or cancelled as part of the winding-up process and any capital loss would have been realized at that time (and thus paragraph 50(1)(a) of the Act would not have been applicable as no debt was outstanding at the end of 1995 - the debtor wasn't even in existence). In the event paragraph 50(1)(a) of the Act is not applicable, and on the assumption the conditions in paragraph 39(1)(c)(ii) of the Act have not been met (e.g. the Shareholder does not deal at arm's length with the corporation), then the Shareholder would not be entitled to business investment loss treatment. In the event the Shareholder did have a disposition of a debt as described in either subparagraph 39(1)(c)(i) or (ii) of the Act, then the 12 month test with respect to the definition of SBC would be relevant from the time of the factual or deemed disposition of the debt.
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If you require further technical assistance, we would be pleased to provide our views.
For your information, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the legislation Access Database (LAD) on the Department's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severe using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (613) 957-0682. The severed copy will be sent to you for delivery to the client.
Jim Wilson
Section Chief
Business, Property & Employment Section II
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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