Principal Issues: [TaxInterpretations translation] Can a taxpayer claim a BIL where the corporation to which the taxpayer has made a loan regains CCPC and SBC status because of the loss of value of some of its foreign investments?
Position: Provided that all of the criteria are satisfied, yes.
Reasons: Income Tax Act.
February 9, 2012
| Shawinigan-South Tax Services Office Compliance Programs Attention: Benoit Pagé |
Headquarters Business and Trusts Division 2011-042687 |
Business investment loss
This is in response to your e-mail of November 4, 2011 regarding the above subject.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the “Act").
You described a situation where a taxpayer has been a sole shareholder of a corporation for several years. In 2002, the taxpayer made a loan to the corporation and the corporation used the funds to make a foreign investment. When making the investment, the corporation lost its status as a small business corporation ("SBC"). In 2004, the investment lost all its value. In 2004 and 2005, the corporation no longer carried on a business, but the debt due to the taxpayer still exists. In 2006, the corporation resumed carrying on its business and once again qualified as a SBC. In 2008, the taxpayer claimed a business investment loss ("BIL").
With respect to the situation described above, you wish to know if the taxpayer can claim a BIL for 2008.
Our Comments
To qualify for a BIL, an amount must in the first place be a capital loss. In that regard, please note that paragraph 39(1)(c) refers only to the principal amount of the debt and thus, uncollectable interest is not included. That interest could be deducted under subparagraph 20(1)(p)(i), which allows the deduction of the total of all debts owing to the taxpayer that are established by the taxpayer to have become bad debts in the year and that have been included in computing the taxpayer’s income for the year or a preceding taxation year.
Where a debt owing to a taxpayer at the end of a taxation year is established by the taxpayer to have become a bad debt in the year, the taxpayer may, if the taxpayer so elects, be deemed by virtue of paragraph 50(1)(a) to have disposed of the debt at the end of the year and to have reacquired it immediately thereafter at a cost equal to nil. There is no specific requirement in the Act for a debt to be considered uncollectible, but this is usually the case where it becomes clear that the debt is unrecoverable because the debtor has become insolvent and there are not enough assets to repay the debt.
The loss resulting from the disposition of such a debt is deemed to be nil by virtue of subparagraph 40(2)(g)(ii) unless the debt was acquired by the taxpayer for the purpose of gaining or producing income from a business or property (other than exempt income). For the purposes of subsection 40(2)(g)(ii), a debt bearing a reasonable rate of interest is a debt acquired for the purpose of earning income.
Where subparagraph 40(2)(g)(ii) is inapplicable, the loss resulting from that deemed disposition generally qualifies as a capital loss within the meaning of paragraph 39(1)(b), or, to the extent that certain conditions set out in paragraph 39(1)(c) are satisfied, as a BIL.
With respect to whether a taxpayer may claim a BIL, it must be determined whether the conditions in paragraph 39(1)(c) that apply to the current situation are met, namely:
- There is a disposition to which subsection 50(1) applies; and
- There is a debt owing by a Canadian-controlled private corporation ("CCPC") that is a bankrupt within the meaning of subsection 248(1), which was a SBC when it last became bankrupt.
In the situation you described, it is necessary to determine, first, whether the debt is due to the taxpayer at the end of its 2008 taxation year and whether it became uncollectible at any time during the same taxation year.
If that were the case, at the time of the disposition of the debt, it is necessary that the corporation be a CCPC that is a SBC. The definition of SBC provides that for the purposes of paragraph 39(1)(c), a corporation is a SBC at a particular time when it was a SBC at a time in the 12-month period preceding the particular time.
Thus, in light of the facts you have given us, it would seem that the requirements set out in the Act respecting a BIL appear to be satisfied. As a result, it appears that the taxpayer could claim a BIL in 2008, the year in which the taxpayer disposed of the taxpayer’s debt.
Access to Information
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity.
Requests for this latter version should be made by you to Ms. Celine Charbonneau at (613) 957-2137. In such cases, a copy will be sent to you for delivery to the taxpayer.
We hope that these comments will be of assistance.
François Bordeleau, Advocate
Manager
Business and Trusts Section
Income Tax Rulings Directorate