XXXX
S. Shinerock (613) 593-6937
March 1, 1982
Dear XXXX
We refer to your letter of January 25, 1982 in which you requested clarification of the term "Allowable Business Investment Loss" within the meaning of paragraph 38(c) of the Income Tax Act (the Act). Your letter described a hypothetical situation, wherein an individual is the sole shareholder of a Canadian-controlled private corporation (CCPC) (within the meaning of paragraph 125(6) (a) of the Act) that itself is a minority shareholder in another Canadian-controlled private corporation which participates in a joint venture in the house construction business with another company. The two joint venturers will hereinafter be referred to as "Participant CCPC" and "Other Joint Venturer", respectively.
Your situation envisages that the joint venture participants borrow funds from a chartered bank. These funds would be used in the business of the joint venture. In respect of the loan, each participant would be required to guarantee each other's portion of the loan. The individual and his CCPC would also be required to guarantee a portion of Participant CCPC's obligation under the arrangement.
Opinions
If the individual and his CCPC could establish that subsection 50(1) of the Act would apply to any loss incurred by either of them with respect to the guarantees given on the loan of Participant CCPC (which would also include any shortfall that Participant would be required to make good on the Other Joint Venturer's share of the loan), then they would have a business investment loss (within the meaning of paragraph 39(1)(c) of the Act) and could deduct the allowable business investment loss in the taxation year that they established such loss to have become a bad debt. Whether a debt is a bad debt that would be subject to the provisions of subsection 50(1) of the Act is a question of fact, which can only be determined by an examination of the relevant facts. If the individual and his CCPC received adequate consideration from Participant CCPC with respect to the loan guarantees, it would seem reasonable to assume that the guarantees were given for the purpose of gain- ing or producing income. Therefore, the provisions of sub- section 50(1) of the Act would seem to apply and the provisions of subparagraph 40(2) (g)(ii) would not apply. See Interpre- tation Bulletin IT239R2 "Deductibility of Capital Losses".
If adequate consideration was not received, then any loss arising from the guarantees would be deemed to be nil by virtue of subparagraph 40 (2) (g) (ii) of the Act. In this case, the individual and his CCPC would have a business investment loss only if all the conditions set out in paragraph 6 of IT-239R2 were met with respect to Participant CCPC.
Yours truly,
for Director Specialty Corporate Rulings Division Corporate Rulings Directorate Legislation Branch