| 19(1) | File No. 5-9207 |
| Peter Lee | |
| (613) 957-2745 |
February 5, 1990
Dear Sirs:
Re: Subsection 18(13) of the Income Tax Act (the "Act") Loss on Disposition of a Property Which is a Loan
We are writing in reply to your letter of December 4, 1989, wherein you requested our opinion as to whether subsection 18(13) of the Act would deny a loss on disposition of a property which is a loan, only to the extent that the loss exceeds any paragraph 20(1)(1) reserve previously claimed.
In a case where the conditions for its application are satisfied, it is our opinion that subsection 18(13) of the Act would deny the full amount of a loss on disposition of a property which is a loan.
This interpretation would result in the same aggregate net income inclusion or deduction, in respect of the year of disposition of the loan and prior years, for taxpayers undertaking "superficial loss" transactions subject to subsection 18(13) of the Act, whether or not they have ever claimed a paragraph 20(1)(1) reserve in respect of the disposed loan.
A taxpayer who has claimed a paragraph 20(1)(1) reserve on a doubtful loan in a year would add the reserve amount to his income in the following year under paragraph 12(1)(d) of the Act and would realize a loss on the doubtful loan only in the year of disposition of the loan. If the disposition is subject to subsection 18(13) of the Act, which is similar to the "superficial loss" rule in paragraph 54(i) of the Act relating to capital properties, the taxpayer would be denied recognition of such loss realization for tax purposes. Subsection 18(13) provides that any denied loss would be added in computing the cost of the loan to the purchaser, including a related non-resident purchaser carrying on business in Canada.
Our opinion is provided in accordance with the practice described in paragraph 24 of Information Circular 70-6R.
Yours truly,
J.C. Clark for DirectorFinancial Industries DivisionRulings Directorate