3 December 1992 Income Tax Severed Letter 922602 - Loss on Debt Guarantee

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                                                   922602
XXXXXXXXXX                                         L. Holloway
                                                   (613) 957-8953

Attention: XXXXXXXXXX

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. Wheeler for Director Business and General Division Rulings Directorate Legislative and Intergovernmental Affairs Branch