| Your File: 52,014 | |
| 19(1) | Our File No. 5-8685 |
| R.B. Day | |
| (613) 957-2136 |
October 25, 1989
Dear 19(1)
We are writing in reply to your letter of September 12, 1989, wherein you requested our interpretation of paragraph 50(1)(a) of the Income Tax Act in the following scenario.
1. A taxpayer (the "Taxpayer") is an unsecured creditor of a debtor (the "Debtor") with whom he deals with at arm's length, and holds the debt (the "Debt") as a capital asset.
2. The Debtor becomes insolvent in a taxation year (the "Year") in circumstances such that the Taxpayer will not be able to collect the full amount of the Debt, and the Debt becomes a bad debt in the Year.
3. The Debtor and Taxpayer agree that the Debtor will pay the Taxpayer something less than the full amount due under the Det in exchange for a full and final release (the "Release") of all further liability under the Debt. The settlement amount is paid and the Release is delivered before the end of the Year such that no amount is, in effect, owing to the Taxpayer at said year end.
Your have requested that we consider the unpaid portion of the Debt to be a debt owing to the Taxpayer at the end of the Year for purposes of paragraph 50(1)(a) notwithstanding the execution and delivery of the Release.
Our Comments
Paragraph 10 of Interpretation Bulletin IT-159R3, entitled "Capital Debts Established to be Bad Debts", states in part that:
"The time at which a debt becomes a bad debt is a question of fact and any decision made must be dependent upon the circumstances in each case. A determination by a creditor that a debt has become bad in a particular taxation year must be supported by all relevant and material facts. Generally, a debt will not be uncollectible at the end of a particular taxation year unless the creditor has exhausted all legal means of paying it. A debt is considered bad for the purpose of section 50 only when the whole amount is uncollectible or when a portion of it has been settled and the remainder is uncollectible..." (Emphasis Added)
In view of these comments it is our opinion that the Taxpayer, in the scenario described above, would be able to claim the deduction permitted by paragraph 50(1)(a) in that a portion of the Debt has been settled and the balance is uncollectible.
The above comments are based on the limited information set out in your letter, and as such, are not binding upon the Department.
Your truly,
for DirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch