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.
Subject: XXX
This is in reply to your memorandum of September 26, 1991 concerning the application of paragraph 39(1)(c) of the Act. In particular you request clarification of the comments in paragraph 2 of our memorandum to Compliance Directorate XXX are not available to us therefore we will confine our comments to the Department's views concerning the application of subsection 50(1) and paragraph 39(1)(c) of the Act.
Where a taxpayer establishes that a debt on capital account has become bad in a taxation year subsection 50(1) provides for a deemed disposition at the end of the taxation year and a deemed reacquisition thereafter of the debt at a cost of nil. Paragraph 10 of IT-159R3 discusses the criteria for the determination as to whether a debt has become bad. This deemed disposition normally results in a capital loss for the year. Provided that subparagraph 40(2)(g)(ii) does not apply and the conditions of paragraph 39(1)(c) are met this loss would be considered a business investment loss. Otherwise the loss would be considered to be a capital loss. Paragraph 3 of IT-484R discusses the relevant conditions that must be met in order that a particular capital loss may qualify as a business investment loss.
The XXX memorandum does not address the issue of whether the loss was a capital loss or a business investment loss. That determination would have been made on the basis of the facts in that case.
Also, we note that the XXX memorandum is based on the premise that the investors were also victims of the fraud. In the case of an investor who was a party to the fraud, it is our view that subparagraph 40(2)(g)(ii) could apply, because the investor may have acquired the debt not to earn income from a business or property but to benefit from a fraud on the Crown. This would depend on whether the fraudulent investor was taking part in the business activity of defrauding other investors (perhaps as a shill) or was merely hoping to benefit from a tax refund (presumably with the major part of the "investment" being returned in some way).
We trust our comments will be of assistance to you.
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