Category Archives: Losses

Change in Residence – Effect on Loss Deductions

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Change in Residence – Effect on Loss Deductions

Zhu v The Queen, 2015 TCC 16

At issue was the deductibility of losses incurred by an individual on the sale of property (shares) after he ceased being a Canadian resident.

FACTS

The Appellant was the CEO of a company and received stock options as part of his compensation package.  After he ceased being the CEO of the company he also left Canada and ceased to be a Canadian resident.

He then exercised his stock options, which resulted in an inclusion in income (half included by operation of ITA 110(1)(d)). However, the shares were sold at a loss, and the CRA denied the deduction of the loss arguing that either the loss was on capital account, and if on business account that at the time the loss occurred the taxpayer was a non-resident and could only deduct losses from income of a business carried on in Canada.

ANALYSIS

The court reviewed the law and stated that if the losses were on capital account, they are not deductible against income (ITA s 3).

If the losses were on account of business, because the taxpayer was a nonresident for part of the year (a part-time resident), then the losses are only deducted in limited circumstances (ITA 114(a)(i).  ITA 115(1)(c) limits deduction of business losses only against income only if the losses are from a business carried out in Canada.

The Court also addressed the Appellants fairness argument and referred to the Federal Court of Appeal decision in Chaya v The Queen, 2004 FCA 327:

[4]        The applicant says that the law is unfair and he asks the Court to make an exception for him. However, the Court does not have that power. The Court must take the statute as it finds it. It is not open to the Court to make exceptions to statutory provisions on the grounds of fairness or equity. If the applicant considers the law unfair, his remedy is with Parliament, not with the Court.

– Sas Ansari, JD LLM PhD (exp)

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Shareholder Loans – Capital or Non-Capital Losses

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Shareholder Loans – Capital or Non-Capital Losses

 SRI Homes Inc v The Queen, 2014 TCC 180

The TCC stated that the law surrounding the losses sustained on the disposition of a shareholder loan made to the corporation was canvassed by Justice Campbell in her decisions in Valiant Cleaning Technology Inc. v. The Queen, 2008 TCC 637, and Excell Duct Cleaning Inc. v. The Queen, 2005 TCC 776, at paragraph 7 where she stated:

In Easton v. R. (1997), 97 D.T.C. 5464 (Fed. C.A.), the Federal Court of Appeal stated the general proposition that an advance made by a shareholder to or on behalf of a corporation will be treated as a loan for the purpose of providing working capital to the corporation. Any resulting loss would therefore be capital in nature as either the loan was given to generate a stream of income or to secure an enduring benefit. However the Court in Eastonrecognized certain exceptions to this general proposition. One of these exceptions exists where the loan was made in the ordinary course of the business. This exception has been recognized as extending to cases where the loan was made for income producing purposes as it related to the taxpayer’s own business (R. v. Lavigueur (1973), 73 D.T.C. 5538 (Fed. T.D.) and Paco Corporation v. R. (1980), 80 D.T.C. 6328 (Eng.) (Fed. T.D.)). Other examples of this exception are where the loan was made for the purpose of increasing the profitability of the taxpayer’s own business (Williams Gold Refining Co. of Canada v. R., 2000 D.T.C. 1829 (T.C.C. [General Procedure])) and where the loan was made for the purpose of protecting the existing goodwill of the taxpayer’s business (Berman & Co. v. Minister of National Revenue (1961), 61 D.T.C. 1150 (Can. Ex. Ct.)).

Therefore, the default position is that the loss from the disposition of a shareholder loan is on account of capital (a capital loss), unless one of the exceptions applied to the case.

The Court agreed that the following activities were a money lending business: (i) Trade Receivables financing; (ii) Inventory financing; (iii) working capital/start-up financing; and (iv) consumer financing (see para 34).  But the shareholder loans in this case did not fall under either of those headings of money lending business. However, the shareholder did make the advance for purposes of earning money from its own business, thus satisfying one of the exceptions.

– Sas Ansari, JD LLM PhD (exp)

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