| 922602 | |
| 24(1) | L. Holloway |
| (613) 957-8953 |
Attention: 19(1)
December 3, 1992
Dear Sirs:
Re: Application of Subparagraph 40(2)(g)(ii) of the Income Tax Act
This is reply to your letter dated August 21, 1992, requesting an interpretation as to the application of subparagraph 40(2)(g)(ii) of the Income Tax Act (the "Act") and the exception to that provision found in paragraph 6 of Interpretation Bulletin IT-239R2.
Specifically, you asked the Department to confirm that subparagraph 40(2)(g)(ii) of the Act would not be applied to deny a capital loss in the following circumstances:
€ the taxpayer received inadequate consideration in return for guaranteeing a debt of the corporation.
€ the loss on the guarantee occurred once the taxpayer was no longer a shareholder.
€ the taxpayer was a shareholder at the time the debt of the corporation was guaranteed.
€ all the other conditions outlined in paragraph 6 of IT-239R2 are met.
Our Comments
It is our view that the exception provided in paragraph 6 of IT-239R2 will not apply where the taxpayer has sold his shares and ceased to be a shareholder of the corporation before the loss is incurred. The Federal Court - Trial Division held in Emerson v. The Queen 85 DTC 5236 at 5238 that "Upon the disposition of the shares there no longer was a source of income, nor a computation of income, in which that interest on the original loan...would be deductible outlays". This decision was confirmed by the Federal Court of Appeal 86 DTC 6184. It is our view the same reasoning would apply in respect of the application of subparagraph 40(2)(g)(ii) of the Act in respect of a loss on a guarantee that was given for less than adequate consideration.
We trust that this will be of assistance to you.
Yours truly,
E. Wheelerfor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch