TSG (Tax Specialist Group) - Allowable Business Investment Losses - Payments to Individuals in Trust for Companies (ABIL's)

Allowable Business Investment Losses - Payments to Individuals in Trust for Companies

Subject: ABIL's
Number: 06-03
Date: 1/27/2006

Payments to individuals on behalf of companies may still be ABIL

In the case of Brand (2005 DTC 1249), the taxpayer had lent money to his son and daughter-in-law that was to be used by their respective active companies. The facts agreed by both the CRA and the taxpayer were:

The taxpayer lent approximately $53,000 to his son and daughter-in-law.
The funds were immediately deposited by the son and daughter-in-law into the bank accounts of the companies owned by his son and daughter-in-law.

It was the taxpayer's intention that the funds he had advanced were to be forwarded to the two active companies.

It is assumed that all the requirements to claim an allowable business investment loss ("ABIL") were met. The only issue to be determined was whether the fact that the funds were paid to the son and daughter-in-law, instead of directly to their companies, would prevent the taxpayer from claiming an ABIL. It was the Minister's position that the loans were made to the individuals and not to the companies so the ABIL claim was unavailable.

The Tax Court judge made an analysis of payments considered to be held in trust. He made it clear from his analysis that there can be a trust situation without written documentation. The son and daughter-in-law confirmed that the two companies planned to repay the borrowed funds. The Court determined that, when the son and daughter-in-law received funds from the taxpayer, they received the funds "in trust" for the companies. Accordingly, the judge determined that the taxpayer was entitled to claim an ABIL for the full amount of the loans, less repayments of about $6,000.

This is an interesting case because even though the funds did not go directly to the companies, the lender could still claim an ABIL. The Court was convinced that the funds were meant for the companies because the document that the son and daughter-in-law signed detailed how they would repay the taxpayer. Where funds have not been advanced directly to a company, there should be documentation evidencing the fact that the funds were to be passed on to the company if you want to claim an ABIL.

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