25 March 1980 Income Tax Severed Letter

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.

March 25, 1980

KINGSTON DISTRICT OFFICE Chief of Audit

HEAD OFFICE W.P. Guglich 995-1787

Mrs. M. Butler, Office Audit

XXXX

In your memorandum of February 1 and our telephone conversation of March 13, you described the following situations

XXXX

The word bankrupt is defined in section 2 of the Bankruptcy Act as "a person who has mane an assignment or against wham a receiving order has been made or the legal status of such a person." Accordingly, for purposes of paragraph 50(1)(b) of the Income Tax Act, the company would be considered to have become a bankrupt during 1978 and the shareholders would be entitled to claim in 1978 a business investment loss in respect of the shares they owned in the company. Also, of course, the payment on the guarantee in 1978 would qualify as a business investment loss in 1978.

Although the loans to the company and the debt acquired by the payments in respect of the bank guarantee are not debts to which paragraph 20(1)(p) applies, the criteria for determining if the debt is bad and the taxation year in which a deduction.- may be claimed is tie same as if it did apply. As pointed out in paragraph 5 of IT-442 " . . . a bad debt may be claimed in a taxation year only if the debt became bad in that year regardless of brow long the debt may have been outstanding. It also follows that a deduction for a debt that became bad in on taxation year cannot be deferred and claimed in a subsequent taxation year. Paragraph 6 of the IT Bulletin discusses some factors to consider in order to determine if the debt is bad, but, the specific wording of both paragraph 50(1)(a) and paragraph 20(1)(p) require the taxpayer to establish that the debts became bad in the particular year. (Refer Hogan vs. M.UIR. 56 DTC 183). Although the parties in this case all had the same information on which to base their determination that the debts were bad, there was disagreement as to the particular year in which it happened.

There may be factors about which we have no knowledge, such as possible proceeds from the sale of assets, but we would have thought that since the company ceased operating in 1977 and a payment had to be made on the guarantee in 1977 a good argument could be made that the debts became bad in 1977. Those who chose 1978 may have felt at the end of 1977 that there was a possibility that funds would be available (perhaps from the sale of assets) to pay off the debts and consequently did not establish that the debts became bad in 1977. If the shareholder had any reason for not claiming the debt became bad in 1977, other than the introduction of the business investment loss provisions into the Act, we feel we would have difficulty convincing a court that 1977 was the year of the loss. In this regard, we would refer you to the Hogan case where, at page 192, Mr. Fisher said "In any event, the legislation indicates that the determination of the bad debts is to be made by the taxpayer and not by anyone else, even an official of the respondent . . ."

The amount in question in the example is a deduction in 1978 of $4,875 in respect of the advance of $1,000 and the guarantee payment of $8,750 made in 1977.

In view of:

a) the specific wording of the law, (b) the comments of (Mr. Fisher quoted above, and (c) the adjustment that would be made to the taxpayer' 1978 income would be $2,875 of which $2,000 would have to be allowed to him in 1977 and $875 allowed to him in 1979

we would not recommend that the adjustment be made.

We hope this will be helpful to You.

Chief Services, public utilities, and Exempt Corporations Section Corporate Rulings Division Corporate Rulings Directorate Legislation Branch

WPG/jw