29 July 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.

July 29, 1980

Policy & Systems

Non-Corporate Rulings Division M. Kisser

E. Rennick Assessing Division

Your memo of July 10 concerning IT-239R

In your situation, a shareholder paid some of his company's accounts payable in 1977. The taxpayer has stated that the accounts were paid .as a result of a guarantee that did not involve any consideration.

Whether a taxpayer is entitled to claim a capital loss in respect of a debt pursuant to our comments in paragraph 5 of IT-239R or in other situations depends on the facts of the particular case.

Paragraph 5 of IT-2398 contemplates the type of situation where a guarantee is given by a shareholder to his company to assist it in carrying out its income earning activities. As it seems that your taxpayer may have guaranteed the debts after his company ceased to carry on business, your situation is not one in respect of which paragraph 5 was written. Nonetheless, from the information you have provided and the amount involved, it seems to as that the taxpayer should be allowed a capital loss in respect of the payments provided they were made at arm's length.

In this regard, please note that, because of the decision of the Federal Court, Trial Division in the case of Frappier vs. The Queen, 76 DTC 6066 the shareholder may have a strong argument for deducting the payments under paragraph 18(1)(a) if they were made to ensure a continual flow of repeat business.

If the taxpayer is to be allowed a capital loss, concern has also been expressed whether his loss should be allowed in 1977 or 1978.

In this regard, the determination, of when, a taxpayer ban a bad debt for the purposes of subsection 50(1) depends on the facts of the case. However, it is not necessary for a corporation in a situation such as yours to have surrendered its charter before a bad debt is considered to exist. (The corporation in your situation surrendered its charter in 1978.) Comments concerning when a debt is considered to be "bad" have also been included in paragraph 9 of IT-159R2 and paragraph 6 of IT-442 .

We also consider the above comments to be in line with the requirement not out in paragraph 5(c) of IT-239R . In determining that a "corporation or partnership has weed permanently to carry on its business" the main objective is to establish that there is essentially no chance that the business will be revived so that the taxpayer can adequately establish that the debt in question is bad.

If the business has ceased its income earning activities, is dormant, has no expectation of profit, has essentially no assets capable of producing income or nose combination of these or other factors indicating that the business has been permanently ceased, we would consider that the requirement in paragraph 5(c) of IT-2391 has been met. It is not necessary that the corporation be bankrupt or formally dissolved to be considered to have permanently ceased to carry on its business.

In your situation, the corporation involved ceased to carry on business in 1977. From our review of the 1977 financial statements, it also appears that the taxpayer's only possibility for obtaining payment of Us debt would be frog funds his corporation sight realise from its accounts receivable of $7154. Therefore, if the taxpayer wishes to claim the loss in 1977, be should establish that those receivables can be considered to be bad debts in that year.

Original Signed By Original signé par K. R. WARREN

for Director Non-Corporate Rulings Division

40(2) (g) (ii) 50(1)