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.
Principal Issues: Whether losses realized in the fact situation provided would be considered an allowable business investment loss pursuant to paragraph 38(c) of the Income Tax Act.
Position: Question of Fact.
Reasons: General comments provided.
XXXXXXXXXX
2010-037920
T. Posadovsky, CMA
(613) 952-8283
September 23, 2010
Dear XXXXXXXXXX :
Re: Allowable Business Investment Loss.
We are writing in reply to your correspondence dated August 18, 2010, wherein you requested a ruling in determining whether certain losses realized by your clients would be considered an allowable business investment loss ("ABIL") pursuant to paragraph 38(c) of the Income Tax Act (the "Act"). You described a situation in which your clients invested funds in a company that is no longer operating and that was possibly part of a fraudulent investment scheme run by the company's promoter.
The particular circumstances outlined in your letter relate to a factual situation involving specific taxpayers. As explained in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, the Income Tax Rulings Directorate of the Canada Revenue Agency ("CRA") does not comment on transactions involving specific taxpayers except by way of an advance income tax ruling in respect of proposed transactions. When the situation involves a specific taxpayer and a completed transaction, the question should be directed to the appropriate tax services office. However, we are prepared to offer the following general comments which may be of some assistance.
Interpretation Bulletin IT-484R2, Business Investment Losses, explains that a taxpayer's business investment loss, as defined in paragraph 39(1)(c) of the Act, may arise from the disposition of either (a) a share of a corporation that is a small business corporation, or (b) a debt owing to the taxpayer by a Canadian-controlled private corporation ("CCPC").
The disposition must be made to an arm's length person or be deemed to have occurred pursuant to an election under subsection 50(1) of the Act. The election under subsection 50(1) of the Act deems the taxpayer to have disposed of a share owned or a debt owing to a taxpayer at the end of a taxation year for nil proceeds resulting in a capital loss.
As explained in paragraph 10 of IT-159R3 Capital debts established to be bad debts, the time at which a debt becomes a bad is a question of fact and any decision made must be dependent upon the circumstances in each case. Generally, a debt will not be uncollectible at the end of a particular taxation year unless the creditor has exhausted all legal means of collecting it or where the debtor has become insolvent and has no means of paying it.
In the case of a share, the corporation must:
- have become a bankrupt (as defined by the Bankruptcy and Insolvency Act) in the year;
- be a corporation referred to in section 6 of the Winding-up and Restructuring Act that was insolvent (within the meaning of that Act) and for which a winding-up order under that Act was made in the year; or
- at the end of the year, be insolvent, and neither the corporation, nor a corporation it controls, carries on business. Also, at that time, the share has a fair market value of nil and it is reasonable to expect that the corporation will be dissolved or wound up and will not commence to carry on business.
Whether a loss on a disposition of the shares or debt would qualify as a business investment loss under paragraph 38(c) of the Act is a question of fact that depends, inter alia, on the status of the corporation as a small business corporation at the time of disposition or in the preceding 12 months. Based on the limited information you have provided, we are unable to determine whether the corporation is a CCPC, whether you held shares or debt, whether the shares or debt were held on account of capital, and whether the corporation ever carried on an active business in Canada.
More information on this topic, as well as an explanation of the meaning of a "small business corporation" and "Canadian-controlled private corporation," is available in IT-484R2 Business Investment Losses, which may be obtained from our website at www.cra-arc.gc.ca. If you require further assistance with this matter, we suggest that your clients contact officials at their local tax services office with all pertinent information that would enable them to determine if the loss is deductible for tax purposes.
Yours truly,
Randy Hewlett
Manager
for Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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