| May 24, 1991 | |
| Audit Applications Division | Financial Industries |
| Ken Warren | Division |
| Director | T. Murphy |
| (613) 957-2744 | |
| Attention: A. Marchand | File No. 7-902125 |
Subject: Referral from Belleville District Office regarding allowable business investment losses ("ABILs")
This is in reply to your memorandum dated June 28, 1989 in which you requested our views on 24(1) We apologize for the delay in responding to your memorandum.
Our understanding of the facts is as follows:
24(1)
24(1)
24(1)
21(1)(b)
(23)
3. At the 1986 Canada Tax Foundation Conference RCT was asked (Q.16(a)):
When a venture capital corporation disposes of its investments in such enterprises (small and medium sized enterprise) will Revenue Canada consider the transactions to be on income or capital account?
RCT's response was:
While venture capital corporations are not normally involved in the day to day management of the Enterprises in which they invest, they do participate in decisions involving corporate strategies relating to the financing, marketing, management and development of the enterprises.
Venture capital corporations look to make a profit from a realization of their investment at the appropriate time through a private placement or a public offering rather than by way of dividend or interest income.
In our view, venture capital corporations are not passive investors but rather are carrying on the business for which they were incorporated. Accordingly most, if not all, of their profits and losses being attributable to such business are on income account.
24(1)
4. ABILs are deductible from all sources of income in the year. If a taxpayer has insufficient income to utilize an ABIL in the year incurred, it becomes a non-capital loss and may be applied to reduce income in the three previous years or in any of the seven future years. If a taxpayer is unable to apply the non-capital loan within these time frames, the unapplied portion becomes a net capital loss in the seventh year and may then be used to reduce capital gains in future years (see paragraph 111(8)(a)).
24(1)
Please note that the above points were discussed with Neil Sine of the Belleville District Office on April 23 and May 9, 1991. Subject to your recommendation, we understand that the district office;
24(1)
Should you have any further questions on this matter, please contact Theresa Murphy.
C.C. B. DarlingngDirectorFinancial Industries DivisionRulings Directorate.