CRA implicitly recognizes that a business investment loss potentially could be recognized on a non-interest bearing loan made to a corporation in which the taxpayer had no equity

Two of the three co-owners of a rental building made interest-free loans to a corporation that was the sole tenant of the building and whose shareholder was the third co-owner. The loans subsequently became bad.

CRA treated MacCallum as standing for the proposition that even though their loans were non-interest-bearing and made to a corporation of which they were not direct or indirect shareholders, the business investment loss claimed by them would not be denied under s. 40(2)(g)(ii) if they had made the loans with “the intention of preserving and recovering a considerable source of income for themselves.” However, in finding that this test was not satisfied, so that their BIL claim was denied, CRA stated that the co-owners “always had the option of renting the property to a tenant other than the Corporation and thus continuing to gain or produce rental income from that property,” i.e., assisting the particular tenant was not necessary to preserving their rentals.

In passing, CRA also acknowledged that Rich established that in order for the loss denial under s. 40(2)(g)(ii) not to apply, an income-producing purpose need not be the “the predominant purpose for the loan” and that “a subordinate purpose is sufficient.”

Neal Armstrong. Summary of 16 June 2016 Internal T.I. 2015-0597971I7 Tr under s. 40(2)(g)(ii).