A Canadian-controlled private corporation (StartupCo) is not a "specified investment business" or a "personal services business" for purposes of the Act. StartupCo needed money to make a deposit on a bid for oil and gas properties that were being held in receivership.
In September 2007, the taxpayer (Mr. O) loaned more than $600,000 to StartupCo. StartupCo agreed to pay Mr. O a $100,000 "commission" for making the loan. The loan was to be paid back to Mr. O by October 4, 2007.
By October 10, 2007, the receiver terminated the purchase agreement for the properties, and StartupCo's deposit was forfeited in accordance with that agreement.
Mr. O claimed his uncollectible debt from StartupCo as a business investment loss of over $600,000 (or allowable business investment loss of over $300,0000) on his 2007 income tax return.
The CRA denied Mr. O's claim on the basis that StartupCo was not a "small business corporation" because it did not carry on an "active business" in 2007 or the 12 preceding months. Instead, the CRA treated Mr. O's uncollectible debt as a capital loss.
Background - Lower court decision
The TCC denied the taxpayer's appeal to claim the $300,000 because it found that the taxpayer did not prove that the debtor corporation carried on an "active business" in Canada during the 12 months that preceded the disposition of the debt. As a result, the TCC agreed with the CRA's characterization of the taxpayer's loss as only a capital loss for tax purposes.
Generally, a taxpayer can deduct from his or her income the allowable portion (i.e., 50%) of a "business investment loss", as defined under subparagraph 39(1)(c)(iv), where that loss is from the disposition of a debt of a "small business corporation". Whether a business is a "small business corporation" is determined under subsection 248(1) of the Act, which generally states that:
- A "small business corporation" must be a Canadian-controlled private corporation whose assets are used principally in an "active business" carried on primarily in Canada
- An "active business" is "any business carried on by the taxpayer other than a 'specified investment business' (SIB) or a 'personal services business" (PSB)"
- A "business" includes "a profession, calling, trade, manufacture or undertaking of any kind whatever" but does not include employment.
The FCA noted that it appears the TCC made its decision on the basis that the word "active" in the expression "active business" must mean something because it is meant to be descriptive of the word "business" and while StartupCo may have been carrying on a business it was not carrying on an "active business".
The FCA noted that the definition of "small business corporation" refers to an active business carried on primarily in Canada. Thus, the expression "active business" is defined in turn as "any business carried on by a taxpayer" other than an SIB or PSB.
The FCA noted that the definition of "active business" was first introduced in 1984 and that it recognizes that any business being carried on is an active business, except for certain exceptions (i.e., SIB and PSB).
The FCA found that, since StartupCo was actively pursuing ventures involving the acquisition of oil and gas properties, it was carrying on an "active business". As a result, the FCA concluded that the TCC made an error when it concluded that more was required to find that StartupCo was carrying on an "active business". Further, since StartupCo had assets that were used exclusively in the above-mentioned pursuit, it follows that StartupCo was a "small business corporation" at the relevant time.
As a result, the FCA found that Mr. O was entitled to claim the loss as an ABIL.
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