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.
July 29, 1982
HEAD OFFICE CORPORATE RULINGS DIRECTORATE D.E. Holtz Tel. (613) 593-6937
RE: XXXX
This is in reply to your memorandum of May 20, 1982 concerning XXXX claim for a "business investment loss" resulting from a debt owed to him by XXXX
Paragraph 39(1)(c) defines a "business investment loss" as a taxpayer's "capital loss" from certain dispositions. Therefore, the primary determination is whether XXXX had a capital loss arising from the disposition of the debt. This will depend on the application of subparagraph 40 (2) (g)(ii); see IT-239R as it applied at that time.
If the debt was non-interest bearing, then subparagraph 40(2) (g) (ii) would deem the capital loss to be nil; and consequently there would be no business investment loss.
However, if the debt was interest bearing, subparagraph 40(2) (g) (ii) would have no application; and XXXX would have a capital loss.
Whether, this capital loss would constitute a "business investment loss" would depend on the applicability of subparagraph 39 (1) (c) (i) or 39 (1) (c)(ii). Clearly, the former has no application because the debt was not owing at the end of the year. However, we believe that subparagraph 39 (1) (c) (ii) may apply. Subparagraph 54(c)(ii)(B) defines disposition to include "any transaction or event by which any debt.... is settled or cancelled". Therefore, there has been a disposition. Whether it was a disposition at arm's length depends on whether XXXX dealt with XXXX at arm's length at the time of the foregiveness. The agreement whereby XXXX
However, your submission does not detail how XXXX regained control later. If he had an option to reacquire control then he controlled the corporation throughout the period XXXX held the majority of shares; and consequently did not deal at arm's length XXXX. We suspect that the acquisition of shares by XXXX was simply to add security to his loan.
We trust that the above commentary will enable you-to determine the tax status of XXXX loss; however, if you have any additional information we would be pleased to review it.
Chief, Finance, Insurance & Leasing Section Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch
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