8 January 1987 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.

DATE January 8, 1987

TO-A Hamilton District Office

FROM-DE Specialty Ruling Directorate
        M. Carsley
        (613) 957-2116

ATTENTION W. Clarke
          Business Files Audit

RE:

This is in reply to your memorandum of October 14, 1986 in which you requested our opinion as to the amount of the loss realized by taxpayer (C) in the situation described in the following paragraph.

Taxpayer (A) formed a corporation in 1967. He subsequently sold the shares to taxpayer (B) for $200,000 with $20,000 down and a note for $180,000. In 1976, taxpayer (B) sold the shares of the company to taxpayer (C). The consideration for this sale was $203,000 with $23,000 down and the transfer of the note payable from taxpayer (B) to taxpayer (C). Since this sale, the company has lost all its assets and no longer exists. Taxpayer (C) has refused to pay taxpayer (A) the amount owed even though taxpayer (A) has received a judgement against taxpayer (C) for the full value of the note.

If the corporation is bankrupt within the meaning of subsection 128(3) of the Income Tax Act (the "Act"), taxpayer (C) would have a capital loss of $203,000 in the year the corporation became bankrupt, pursuant to subsection 50(1) of the Act. If the corporation was a small business corporation, as defined in subsection 248(1) of the Act, and it became bankrupt after 1977, the capital loss would be a business investment loss as defined in paragraph 39(1)(c) of the Act.

If taxpayer (C) settles the debt obligation for an amount less then the principal amount, of the debt then section 80 of the Act would apply.

We trust this information will be of assistance to you.

Yours truly,

Chief Foreign and Small Business Section Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch