31 March 1993 Income Tax Severed Letter 3M05210-48 - APFF 1992: Question 48—Business investment loss

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                     TRANSLATION FROM FRENCH

ASSOCIATION DE PLANIFICATION FISCALE ET FINANCIFERE

                   REVENUE CANADA ROUND TABLE

1992 CONFERENCEASSOCIATION DE PLANIFICATION FISCALE ET FINANCIFERE
                   REVENUE CANADA ROUND TABLE
                          October 1992

Question 48

Business investment loss

Paragraph 39(1)(c) of the Act defines "business investment loss", which is given preferential treatment under the Act.

An individual is the sole shareholder and director of a corporation operating a small business within the meaning of subsection 248(1) of the Act. Following the bankruptcy of this corporation, the individual is required to pay the unpaid wages at the time of the bankruptcy and withhold at source on these wages (taxes, Quebec Pension Plan, unemployment insurance and so on).

Does Revenue Canada, Taxation think that these payments can be treated as business investment losses for the purposes of the Act?

Department of National Revenue response

Division 39(1)(c)(iv)(B) of the Act states that a capital loss resulting from the disposition of a debt on a Canadian-controlled private corporation that is bankrupt within the meaning of subsection 128(3) of the Act, which was a corporation operating a small business at the time it became bankrupt for the last time qualifies as a business investment loss.

Also, subparagraph 40(2)(g)(ii) of the Act provides that any loss resulting from the disposition of a debt or the right to receive an amount, unless the debt or right, as the case may be, was acquired by the taxpayer with a view to earning income (not tax exempt) from business or property, is deemed nil. In this connection, paragraph 6 of Interpretation Bulletin IT-239R2 sets out the circumstances and conditions under which a loss resulting from, among other things, the payment of a debt under a guaranty for which the guarantor received insufficient consideration, is not considered by the Department as a nil loss under subparagraph 40(2)(g)(ii) of the Act.

In the situation you presented, it is our view that the payments of unpaid wages and source deductions on these wages by the sole shareholder (and director), resulting from joint and several liability with the corporation as director, are debts on the corporation. In addition, we would apply to such debts, by analogy, the same exceptional conditions provided for in the above-mentioned Interpretation Bulletin, if the conditions in paragraph 6 of the said Bulletin were met. Accordingly, we believe that these debts could be eligible for business investment losses for the purposes of paragraph 39(1)(c) of the Act.