23 November 1999 External T.I. 9918155 - ABIL S/H LOAN

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:

Whether a loss on debt would qualify as a "business investment loss" (a "BIL").

Position TAKEN:

No, based on the limited information provided.

Reasons FOR POSITION TAKEN:

The corporation owing the debt is not, nor has it been at any time in the previous 12 months, a "small business corporation" as defined in subsection 248(1).

XXXXXXXXXX 5-991815
M. Azzi
Attention: XXXXXXXXXX

November 23, 1999

Dear Sirs:

Re: Allowable Business Investment Loss

This is in reply to your letter of June 22, 1999, wherein you requested our views on whether your client will be entitled to claim an allowable business investment loss upon the winding-up of his corporation.

We understand that your client, an individual, owns all of the issued and outstanding shares of a corporation ("Holdco"), which in turn owned one third of the share capital of an operating company ("Opco") from XXXXXXXXXX . Holdco borrowed $XXXXXXXXXX from the individual, in XXXXXXXXXX, to purchase the Opco shares for $XXXXXXXXXX and to make a cash advance of $XXXXXXXXXX to Opco. On XXXXXXXXXX, Holdco sold its investment in Opco at a loss, and applied the proceeds from the sale against the debt to its shareholder, such that after the sale it still owed the individual $XXXXXXXXXX. You indicate that, at the time of the sale, both Holdco and Opco were "small business corporations". We understand that your client requested an adjustment, to his XXXXXXXXXX income tax return, to claim a business investment loss in respect of his $XXXXXXXXXX loan to Holdco, but that the claim was reviewed and denied by the XXXXXXXXXX Tax Services Office.

It appears, from the information provided, that since the sale of the Opco shares, there has been no activity in Holdco, except for the holding of a minimal amount of marketable investments. You indicate that Holdco is an inactive company attempting to earn capital gains to offset the huge capital loss that it incurred on the sale of its Opco investment. You enquire whether, on the wind-up of Holdco, your client will be entitled to a business investment loss in respect of his above loan to Holdco.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3, dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant tax services office ("TSO"). Accordingly, as previously discussed (Azzi/XXXXXXXXXX) we will not comment on the claim reviewed by the TSO, and any concerns you may have with that claim should be addressed to the TSO. However, we are prepared to offer the following general comments with respect to a claim on the winding-up of Holdco. It should be noted that, for purposes of this reply, we assume that subparagraph 40(2)(g)(ii) of the Income Tax Act (the "Act") would not apply to deem a loss on the above-noted loan to be nil, although we have not been provided with information in order to make such a determination.

In order for a taxpayer's loss to qualify as a "business investment loss" (a "BIL"), as defined in paragraph 39(1)(c) of the Act, it must, inter alia, result from the disposition of a property that is a debt owing to the taxpayer by a "small business corporation". The term "small business corporation" ("SBC") is defined in subsection 248(1) of the Act. In general terms, an SBC, at a particular time, is a Canadian-controlled private corporation all or substantially all of the fair market value of the assets of which, at that time, is attributable to assets used principally in an active business carried on primarily in Canada by the corporation or a related corporation, to shares or debts of connected SBCs, or to a combination of the two. In addition, for purposes of determining a BIL from a disposition, an SBC includes a corporation that was an SBC at any time in the 12 months before the disposition.

Accordingly, whether a loss on a disposition of the above-noted debt would qualify as a BIL is a question of fact which depends, inter alia, on the status of Holdco as an SBC at the time of disposition or in the preceding 12 months. Based on the limited information provided, it does not appear that, since the disposition of its Opco shares, Holdco has owned any shares or debt of an SBC, nor has Holdco itself carried on an active business or its assets been used in an active business. Consequently, in our view, Holdco does not currently qualify, and has not qualified in the previous 12 months, as an SBC, such that a loss on the above-noted debt could not, at this time, qualify as a BIL.

We trust that these comments will be of assistance.

Yours truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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