IT-239R2 "Deductibility of Capital Losses from Guaranteeing Loans for Inadequate Consideration and from Loaning Funds at less than a Reasonable Rate of Interest in Non-arm's Length Circumstances"

Former s. 245(2) may have been applied in situations where there is a material benefit to other shareholders as a result of a minority shareholder making a loan to, or honouring a guarantee in respect of, a Canadian corporation controlled by him and members of his family.

6. Where a taxpayer has loaned money at less than a reasonable rate of interest to a Canadian corporation of which he is a shareholder, or to its Canadian subsidiary, or has guaranteed the debts of such a corporation for inadequate consideration, any subsequent loss arising to him from the inability of the corporation to discharge its obligations to him, or from having to honour the guarantee, may be a deductible capital loss to him despite the absence of a reasonable rate of interest or adequate consideration. Generally it is the Department's practice to allow a loss on such a loan or guarantee and not treat it as being nil by virtue of subparagraph 40(2)(g)(ii) if the following conditions are satisfied:

(a) the corporation to whom the loan was made or whose debts were guaranteed used the borrowed funds in order to produce income from business or property, or used the borrowed funds to lend money at less than a reasonable rate of interest to its Canadian subsidiary in turn to be used to produce income from business or property,

(b) the corporation has made every effort to borrow the necessary funds through the usual commercial money markets but cannot obtain financing without the guarantee of the shareholder at interest rates at which the shareholder could borrow,

(c) the corporation has ceased permanently to carry on its business, and

(d) the loan from the shareholder to the corporation at less than a reasonable rate of interest (or at no interest) does not result in any undue tax advantage to either the shareholder or the corporation.