One of the conditions required to claim an ABIL is that the loan was advanced to earn income(Subparagraph 40(2)(g)(i)). The loan agreement stipulated that interest at 6% was to be charged, but payments would not commence until 2009, which, as it would turn out, was after the business eventually ceased. The Minister argued that no interest was charged, and therefore, there was no intent to earn income. This was partially based on accounting records of the daughter’s company which were inconsistent in their reflection of accruing the interest.

2017-10 CAPITAL GAINS/LOSSES ALLOWABLE BUSINESS INVESTMENT LOSS (ABIL) –LOAN TO DAUGHTER’S COMPANY

In a June 9, 2017 Tax Court of Canada case (Gingras vs. H.M.Q., 2013-4696(IT)G), at issue was whether an ABIL could be claimed in respect of the loan from a taxpayer to his daughter’s start-up company.Within approximately two years, operations had ceased and the daughter had claimed personal bankruptcy. One of the conditions required to claim an ABIL is that the loan was advanced to earn income(Subparagraph 40(2)(g)(i)). The loan agreement stipulated that interest at 6% was to be charged, but payments would not commence until 2009, which, as it would turn out, was after the business eventually ceased. The Minister argued that no interest was charged, and therefore, there was no intent to earn income. This was partially based on accounting records of the daughter’s company which were inconsistent in their reflection of accruing the interest.

Taxpayer wins Despite the conflicting records the Court opined that the interest rate included in the agreement was legitimate and that there was an intent to earn income. The ABIL was allowed.

PRINCIPAL RESIDENCE EXEMPTION (PRE) –DESTROYED PROPERTY In a July 13, 2017 Technical Interpretation (2017-0702001E5, Robinson, Katie), at issue was the applicability of the principal residence exemption to the sale of the land remaining after the principal residence that was previously located on it was destroyed by fire. CRA opined that for calendar years subsequent to fire, the conditions for designation as a principal residence (Section 54) would not be met.Presumably, CRA was referring to the requirement that the property be ordinarily inhabited in the year. However, it was noted that the full gain could be eliminated by the “+1” rule in the formula if the land were sold in the subsequent year to the fire, and the property eligible for designation in all prior years.

SETTLEMENT OF FORWARD CONTRACTS – INCOME OR CAPITAL In an August 8, 2017 Tax Court of Canada case (MacDonald vs. H.M.Q., 2013-4032(IT)G), an individual entered into a forward contract (FC) to speculate against a short-term increase in the trading price of Bank of Nova Scotia (BNS) shares. Although the taxpayer also held actual BNS shares, the FC was to be settled in cash with no exchange of shares. As the stock value increased, the taxpayer suffered $9.9 million in lossesrelated to the FC. At issue was whether the loss was on account of income or capital.

Taxpayer wins CRA argued that the contract was obtained to hedge against the taxpayer’s capital investments in BNS shares and was, therefore, capital in nature. However, the taxpayer argued that the FC was not a hedge, the intent was to profit in the short-term, that it was pure speculation, and simply an adventure in the nature of trade. The Court found the taxpayer to be a credible witness. Also, it examined the taxpayer’s investment history, including the quantum and timingof transactions, but found insufficient evidence to tie the FC to the BNS shares as a hedge. As such, the loss was determined to be on account of income