26 February 1981 Income Tax Severed Letter RCT 247-047

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.

Attention: XXX.

Dear Sirs:

Re: Subsections 15(1) and 247(1) of the Income Tax Act (the "Act")

This is in reply to your letter dated October 23, 1980 in which you present the following hypothetical situation:

• 1. A Ltd. and B Ltd. are both wholly-owned by Mr. X, a Canadian resident individual.
• 2. A Ltd. has a deficit of $100,000 resulting from losses in a discontinued business. It has no assets, and its only liability is a shareholder's loan of $100,000 from Mr. X (issued share capital is nominal).
• 3. B. Ltd. is a profitable company having substantial assets and retained earnings.
• 4. In order to effectively utilize the non-capital losses of A Ltd., it is proposed that A Ltd. and B Ltd. amalgamate to form Amalco. Ltd.

You wish to be advised as to whether or not, by virtue of the amalgamation:

• (a) Mr. X would receive a benefit, under subsection 15(1) of the Act, in the amount of $100,000, since his previously worthless loan receivable would be worth $100,000 after the amalgamation, or
• (b) upon payment of any portion of Mr. X's loan by Amalco subsection 247(1) of the Act should be applied to Mr. X.

With regard to (a) and (b) above you also wish us to advise to what extent, if any, the view that the Department would take would be dependent on whether or not Mr. A has claimed an allowable business investment loss with respect to his $100,000 loan, as a result of the application of subsection 50(1) of the Act.

Assuming that A Ltd. and B Ltd. are corporations which meet the tests described in subsection 87(1) of the Act, the liabilities of A Ltd., comprising Mr. X's loan, would become the liabilities of Amalco following the amalgamation.

Whether subsection 247(1) or 15(1) of the Act would apply in any specific situation would, of course, depend on the facts involved. As this is a hypothetical situation we do not wish to express any opinion on the possible application of subsection 247(1).

With regard to whether or not Mr. X would be considered to have received a benefit under subsection 15(1), you will apreciate that any opinion expressed with respect to this hypothetical situation may not necessarily apply in a particular set of circumstances. Bearing this in mind we would not expect that the provisions of subsection 15(1) of the Act would be applied by reason of the amalgamation, in and by itself.

Assuming that Mr. X is able to claim an allowable business investment loss in respect of the debt pursuant to paragraph 39(1)(c) of the Act and section 80 applies, it is unlikely that a liability would continue to exist Thereafter. Where section 80 does not apply (as is possible with the application of subsection 50(1), our comments would be as expressed above.

We trust you will find the above comments helpful.