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.
June 16, 1986 HEAD OFFICE Financial Industries Division A. Godin Tel. (613) 995-2455
XXXX Loss from Guaranteeing Loan of U.S. Company
This is in reply to Mr. K.N. Allan's memorandum of May 1, 1986 wherein he requested our opinion on the deductibility of capital losses arising when a taxpayer is required to honour a guarantee.
Facts
XXXX
Your Opinion
You are of the view that XXXX can claim a capital loss in respect of the XXXX since the conditions expressed in paragraph 6 of IT-239R2 have all been met, except for the requirement that the guaranteed debts be those of a Canadian corporation. In your view, this requirement is administrative and in light of the recent decision of the Tax Court of Canada in the Dunlop case, it need not be adhered to.
Our opinion
We cannot agree with your opinion.
The Department's position continues to be as stated in IT-239R2 that a capital loss arising from honouring a guarantee given for inadequate or for no consideration is nil by virtue of subparagraph 40(2)(g)(ii) of the Income Tax Act (the "Act"). The jurisprudence supports this view (see Canada Safeway Limited v. MNR 57 DTC 1234 and DVS Corporation v. MNR 6P DTC 5045) as the Supreme Court has given a narrow interpretation to the words "for the purpose of gaining or producing income from a business or property".
The recent Dunlap case referred to in your letter is, in our view, distinguishable on its own facts. The information available on this case indicates that although the notes which gave rise to the capital loss were in fact non-interest bearing, they were received in the process of a reorganization in replacement of equity and interest hearing notes. This was done to secure the taxpayer's original investments. The Court found, and we agreed, that the colour, the purpose, or intention of the making of the advances did not change.
The Department has adopted the position with respect to Canadian corporations that it will allow a loss as stated in paragraph 6 of IT-239R2 where certain conditions are met. Although there is nothing in the Act which supports taking this position, it was taken in view of the fact that small corporations are often able to obtain outside financing only where the debt is guaranteed by a shareholder or partner and because it was felt that there would be no loss to the tax system.
We trust that the above will he of some assistance.
Original signed by Original signé par N.W. ANGELL
Chief Leasing and Financing Section Financial Industries Division Rulings Directorate
Legislative and Intergovernmental Affairs Branch
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