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:
Whether a statutory obligation, imposing a joint and several liability on corporations and their directors for unpaid wages, falls within the ambit of paragraph 39(12)(a).
Position TAKEN:
No.
Reasons FOR POSITION TAKEN:
Based on position taken in other files - it is our general view that a statutory obligation, such as the one described above, is not an "arrangement under which the taxpayer guaranteed the debt", as used in paragraph 39(12)(a) of the Act. These views are consistent with the findings of the Tax Court of Canada, in Jackman, 91 DTC 1275, that a director's statutory obligation under subsection 227.1 of the Act, regarding a corporation's unremitted source deductions, is not a "guarantee" by the director in respect of such debts of the corporation.
XXXXXXXXXX 1999-000799
M. Azzi
Attention: XXXXXXXXXX
January 18, 2000
Dear Sirs:
Re: Business Investment Loss
This is in reply to your letter of November 19, 1999, wherein you requested our views on whether a particular amount can qualify as a business investment loss ("BIL") by virtue of the application of subsection 39(12) of the Income Tax Act (the "Act").
We understand that a director of a corporation also owns some shares of the corporation, and is required to pay employee wages owing by the corporation pursuant to provincial legislation. You indicate that the provincial legislation in question imposes a joint and several liability on corporations and their directors for unpaid wages. You enquire whether such an obligation falls within the ambit of paragraph 39(12)(a) of the Act.
Written confirmation of the tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3, dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant tax services office. However, we are prepared to offer the following general comments.
As you know, in order for subsection 39(12) of the Act to apply, an amount must, inter alia, have been paid "by a taxpayer in respect of a debt of a corporation under an arrangement under which the taxpayer guaranteed the debt". It is our general view that a statutory obligation, such as the one described above, is not an "arrangement" as used in paragraph 39(12)(a) of the Act. Accordingly, such a statutory obligation does not fall within the ambit of paragraph 39(12)(a) of the Act. These views are consistent with the findings of the Tax Court of Canada, in Jackman v. M.N.R., 91 DTC 1275, that a director's statutory obligation under subsection 227.1 of the Act, regarding a corporation's unremitted source deductions, is not a "guarantee" by the director in respect of such debts of the corporation.
We would also note that in order for a loss to qualify as a BIL it must first qualify as a capital loss. Therefore, where the capital loss is deemed to be nil by virtue of paragraph 40(2)(g) of the Act, no BIL can result. As stated in paragraph 2 of Interpretation Bulletin IT-159R3, under subparagraph 40(2)(g)(ii) of the Act, a taxpayer's loss arising from the disposition of a debt is nil unless the debt was acquired by the taxpayer for the purpose of gaining or producing income from a business or property. Accordingly, in the above circumstances, while it could be argued that the payment by the director of the corporation's unpaid salaries creates a debt owing by the corporation to the director, if the payment is made by the director when the corporation is bankrupt or insolvent and no longer carrying on business, in our view, the purpose test in subparagraph 40(2)(g)(ii) of the Act would likely not be met, such that paragraph 40(2)(g) of the Act would deem any resulting loss to be nil. These views are also consistent with the Jackman case, where it was found that the payment by the director of the corporate liability of unremitted source deductions did not present in any way the prospect that either the director or the corporation could gain or produce income therefrom.
We trust that these comments will be of assistance.
Yours truly,
Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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