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.
G. D. Middleton
January 29, 1982
Dear XXXX
This is in reply to your letter of November 20, 1981 and to our recent telephone conversations concerning the deductibility of periodic payments made to a guarantor of a loan; legal expenses incurred in litigation to determine the amount owing by a guarantor of a loan; and losses arising from the payment of a capital debt to honour a guarantee.
Since all of the facts relating to your particular situation cannot be determined, we are unable to answer your specific questions. However, we would like to make the following general comments which may apply to your situation:
a) Paragraph 16 of Interpretation Bulletin IT-341 states that the deduction permitted by subparagraph 20(1)(e)(ii) of the Income Tax Act (the "Act") in respect of periodic payments paid to a guarantor of a loan is restricted to the person who borrows the money. This position is reinforced in paragraph 12 of Interpretation Bulletin IT-341R which will be released in the near future.
b) Paragraph 1 of Interpretation Bulletin IT-99R states that legal expenses will generally be deductible if they are incurred for the purpose of gaining or producing income from a business or property and they are not outlays of a capital nature.
c) Paragraph 5 of Interpretation Bulletin IT-239R and paragraphs 6 and 11 of Interpretation Bulletin IT-239R2 deal with the Departmental practice concerning capital losses where a shareholder guaranteed a loan for his company for no consideration and subsequently, he makes a payment of a capital debt under the guarantee.
d) Provided that a loss qualifies as a capital loss within the assessing of paragraph 39(1) (b) of the Act and provided that the conditions of paragraph 39(1) (c) of the Act are satisfied, the loss will qualify as a business investment loss.
We trust this information will be of assistance to you.
Yours truly,
for Director Non-Corporate Rulings Division 20(1)(e) 40(2)(g)(ii) 50(1) 39(1)(c)
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