S4-F8-C1, Business Investment Losses

Introduction

The purpose of a Chapter History page is to highlight any amendments to the information contained in an interpretation bulletin that is now reflected in a chapter of an income tax folio as well as to identify any subsequent amendments to a folio chapter. It outlines amendments that have been made as a result of legislative changes and proposed legislative changes, precedential court decisions, as well as new or revised interpretations of the Canada Revenue Agency (CRA).

Except as otherwise noted, all statutory references herein are references to provisions of the Income Tax Act, R.S.C., 1985, c.1 (5th Supp.), as amended and all references to a Regulation are to the Income Tax Regulations, C.R.C., c.945, as amended.

Update February 18, 2017

¶1.42 of the French version has been updated to replace the words “même si ces paiements ont été effectués avant que la société ait cessé d'exploiter son entreprise activement” with “même si la société avait cessé d'exploiter son entreprise activement avant d’effectuer les paiements”.

Update September 27, 2016

General

Income Tax Folio S4-F8-C1, Business Investment Losses, replaces and cancels Interpretation Bulletin IT-484R2, Business Investment Losses.

In addition to consolidating the content of the former interpretation bulletin, general revisions have been made to improve readability. Any substantive technical and interpretive changes to the information outlined in the former interpretation bulletin are described below.

Legislative and other changes

The Chapter Summary has been updated to reflect that—subject to certain transitional rules—for tax years ending after February 27, 2000, paragraphs 38(a), (b) and (c) of the Act were amended by S.C. 2001, c.17, s.22 (Bill C-22), assented to on June 14, 2001, reducing the fraction that applies in those paragraphs from ¾ to ½. The Chapter Summary has also been updated to reflect that for losses that arise in the 2006 and subsequent tax years, for purposes of applying paragraph 111(1)(a), paragraph (c) of the description of E in the definition of non-capital loss in subsection 111(8) was amended by S.C. 2006, c.4, s.57(3) (Bill C-13), effectively limiting the carryforward period of a non-capital loss arising from an ABIL to 10 years.

¶1.1 (formerly ¶1 of IT-484R2) has been updated to reflect that the inclusion rate in section 38, as amended by S.C. 2001, c.17, s.22, is one-half.

¶1.5 – 1.8 (formerly ¶2 of IT-484R2) have been updated to reflect that effective for losses that arise in the 2006 and subsequent tax years, for purposes of applying paragraph 111(1)(a), paragraph (c) of the description of E in the definition of non-capital loss in subsection 111(8) was amended by S.C. 2006, c.4, s.57(3) (Bill C-13), effectively limiting the carryforward period of a non-capital loss arising from an ABIL to 10 years. Formerly, the maximum carryforward period for such non-capital losses was 7 years.

¶1.9 has been added to clarify that when the carryforward period for any non-capital loss in respect of an ABIL expires to become a net capital loss, the net capital loss is then subject to any adjustment provided under subsection 111(1.1).

¶1.11 - 1.13 (formerly ¶3 and 4 of IT-484R2) have been updated to reflect that for tax years ending after February 21, 1994, subsection 248(1) was amended by S.C. 1995, c.21, s.43(2) to add the defined term bankrupt. The content has also been updated to replace the reference to the Winding-up Act with a reference to the Winding-up and Restructuring Act to reflect the wording of subparagraph 50(1)(b)(ii), as amended by S.C. 1996, c.6, s.167(2), effective June 28, 1996.

¶1.15 has been added to inform the reader about what the terms all or substantially all, principally, and primarily are understood to mean.

¶1.16 has been added to discuss the terms arm’s length and non-arm’s-length, and refers the reader to Income Tax Folio S1-F5-C1, Related Persons and Dealing at Arm’s Length, for more information about the meaning of these terms.

¶1.17 has been added to reflect that for tax years ending after February 21, 1994, subsection 248(1) of the Act was amended by S.C. 1995, c.21, s.43(2) to add the defined term bankrupt.

¶1.21(a) (formerly ¶6 of IT-484R2) has been updated to reflect that in the Act, the term bankrupt is defined in subsection 248(1), applicable to tax years that end after February 21, 1994.

¶1.21(b) (formerly ¶6 of IT-484R2) has been updated to remove the reference to the Winding-up Act and replace it with a reference to the Winding-up and Restructuring Act.

¶1.23 has been added to clarify that in applying section 50 in respect of a debt or a share, it is the end of the tax year of the taxpayer making the election that is relevant.

¶1.24 has been added to clarify that in applying subparagraph 50(1)(b)(iii) in respect of a debt, the term insolvent is to be given its ordinary dictionary meaning.

¶1.25 has been added to provide information about requests to make a late subsection 50(1) election.

¶1.26 -1.28 have been added to provide information about requests to revoke a subsection 50(1) election.

¶1.29 - 1.31 have been added to provide information about subsection 50(1.1), which was added by S.C. 1994, c.7, Sch. II, s.28(1) and (2), applicable to the 1990 and subsequent tax years.

¶1.33 has been added to clarify that for paragraph 50(1)(a) to apply in a tax year in respect of a debt, among other things the taxpayer must have established that the debt became a bad debt during that tax year of the taxpayer.

¶1.34 has been added to update the position in ¶10 of IT-159R3, Capital debts established to be bad debts, to clarify that there is no legal requirement that in all cases the creditor must exhaust all legal means of collection before establishing that a debt became uncollectible in the year.

¶1.35 has been added to advise that for purposes of applying paragraph 50(1)(a), a taxpayer’s determination that a debt became a bad debt during the year must be both an honest and reasonable one taking into consideration all relevant and material facts.

¶1.36 has been added to list factors summarized by the Federal Court of Appeal in Rich v the Queen 2003 FCA 38, 2003 DTC 5115 that are normally to be considered in establishing whether a debt has become a bad debt.

¶1.37 and 1.38 have been added to reflect the Federal Court of Appeal’s comments in Rich about the consideration to be given to other factors, namely, future prospects of the debtor and, any non-arm’s-length relationship between the creditor and the debtor.

¶1.44 has been added to describe subparagraph 40(2)(g)(ii).

¶1.45 has been added to clarify that for purposes of the exception in 40(2)(g)(ii), the income-earning-purpose requirement refers to that of the creditor who lends the funds to, or guarantees the debts of the corporation.

¶1.46 has been added to reflect the Federal Court of Appeal decision in Byram v The Queen, 1999 DTC 5117 (FCA); [1999] 2 CTC 149.

¶1.47 has been added to reflect that in terms of meeting the exception for income-earning purpose in subparagraph 40(2)(g)(ii), there must be sufficient connection between the creditor making the loan to, or guaranteeing the debts of the corporation, and the potential for earning income from business or property.

¶1.52 (formerly ¶8(b) of IT-484R2) has been updated to reflect that clauses 39(1)(c)(vi)(B) and (C) were amended by S.C. 2000, c.12, Sch. II, s.1(e), to replace "spouse" with "spouse or common-law partner."

¶1.53 (formerly ¶8(c) of IT-484R2) has been updated to reflect that subparagraph 39(1)(c)(vii) was amended by S.C. 2000, c.12, Sch. II, s.1(e), and by S.C. 2014, c.43. s.10(2), applicable to the 2014 and subsequent tax years.

¶1.54 has been added to reflect that, subparagraph 39(1)(c)(vii) was amended, and the definition of settlor in subsection 108(1) was repealed by S.C. 2014, c.43. s.10(3), effective for the 2016 and subsequent tax years.

¶1.55 has been added to clarify that before the 2014 tax year, subparagraph 39(1)(c)(vii) only applied to a trust referred to in paragraph 104(4)(a).

¶1.56 has been added to note the transitional provision that under certain conditions allowed a taxpayer to jointly elect with another person to be treated as each other’s common-law partner for the 1998, 1999, and 2000 tax years.

¶1.61 has been added to describe for purposes of the Chapter what is meant by the term business investment loss otherwise determined.

¶1.66 has been added to note that the finer details about the calculations involved in applying subsections 39(9) and (10) are beyond the scope of the Chapter

¶1.74 has been added to reflect that for the 2016 and subsequent tax years, subsection 164(6) was amended by S.C. 2014 C.43, s.60(2) (Bill C-43) to change the reference in the preamble of that subsection from "estate" to "graduated rate estate."