9 April 1986 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.

XXXX

April 9, 1986

XXXX

Dear:

Re: Capital Debts established to be Bad Debts

This is in reply to the third point in your letter of December 16, 1985 addressed to XXXX which was forwarded to us on February 24, 1986 for reply.

In your letter you ask if it is possible to claim a capital loss on a debenture upon which payment of interest has been defaulted. Moreover there is evidence that the issuer has not been able to work out new financing arrangements so that bankruptcy is inevitable.

Our comments

Subsection 50(1) of the Income Tax Act (the "Act") permits, in certain circumstances, a bad debt to be claimed as a capital loss in the year. Any subsequent recoveries will be capital gains.

The Department's position relative to a bad debt in respect of a capital property is contained in Interpretation Bulletin IT-159R2 , a copy of which is enclosed for your purposes.

In order to claim the provisions of this subsection with respect to a loss on a debenture, the taxpayer would have to establish, among other things, that the debenture was acquired for the purpose of gaining non-exempt business or property income and that the debenture has in fact become a bad debt in the year. In this connection, as set out in paragraph 9 of IT-159R2 , the determination of when a debt becomes a bad debt is a question of fact. Although the Act in subsection 50(1) uses the words "a debt ... is established by him to have become a bad debt in the year", it is the Department's view that a debt does not become bad until it in fact becomes uncollectable.

In this connection it is our view that a taxpayer, in the circumstances described above, would be able to avail himself of the provisions of subsection 50(1) of the Act when it can be shown that the whole amount of the debt is uncollectable or when a portion of it has been settled and the remainder is uncollectable.

Where the provisions of subsection 50(1) of the Act are applicable in a taxation year and the deemed disposition of a debt produces a capital loss, one-half of such loss may be deductible as an allowable business investment loss from a taxpayer's income. In order to claim an allowable business investment loss in the circumstances described above, the issuer of the debenture would have to be a "small business corporation" and not a public corporation. Where the issuer is not a small business corporation, any loss arising from the deemed disposition of debentures would be an ordinary capital loss which after 1985 can only be offset against capital gains.

We trust our comments will prove helpful in resolving the issue raised in your letter.

Yours truly,

ORIGINAL SIGNED BY Wm. R. McColm

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch

c.c. Lorne Nystrom, M.P. Yorkton-Melville House of Commons K1A OA6