19 April 1999 External T.I. 9903715 - LOSS ON FUNDS -NO REASONABLE RATE OF INTEREST

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

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.

Principal Issues: Is a non-arm's length relationship required to avail oneself of the administrative position in paragraph 6 of IT-239R2

Position: IT 239R2 discusses non-arm’s length relationships - arm’s length transactions should look to the business purpose of the transaction itself.

Reasons: capital loss allowable where certain conditions are met

XXXXXXXXXX 							990371
C. Tremblay
Attention: XXXXXXXXXX 

April 19, 1999

Dear Madam;

Re: Loss on funds lent when a reasonable rate of interest is not charged

This is in reply to your letter of January 28, 1999, in which you asked about the Department’s current administrative position allowing a taxpayer to claim a loss on funds lent at less than a reasonable rate of interest. You specifically ask whether the conditions stated at paragraph 6 in Interpretation Bulletin 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 require a non-arm’s length relationship.

Generally, subparagraph 40(2)(g)(ii) of the Act provides that a taxpayer’s loss arising from the disposition of a debt is nil unless the debt has been acquired by the taxpayer for the purpose of gaining or producing income from a business or property. As set out in paragraph 5 of IT-239R2, the Department’s general position is that money loaned at a reasonable rate of interest constitutes a debt acquired for the purpose of gaining or producing income. The conditions listed in paragraph 6 of IT-239R2 are those that make up an exception to the general position. As noted from the title, the bulletin considers the exception to the general position in a non-arm’s length relationship.

We trust that these comments are of assistance

J. F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch