Abil on loan made to ‘alter ego’ of corporation not allowed
An allowable business investment loss (ABIL) is deductible against all forms of income, as opposed to other allowable capital losses, which are normally deductible only against taxable capital gains. In very general terms, an ABIL includes a loan made by a taxpayer to a Canadian-controlled private corporation (CCPC) that has become an uncollectible debt (certain other criteria apply).
In the recent Barnwell case, the taxpayer lent money to an individual (Austin) to be invested in a travel book business. The business was actually carried on by a corporation owned by Austin. Apparently, the taxpayer believed the loans, although provided to Austin, were made `in favour` of the corporation. Eventually, the business venture collapsed and part of the loans made by the taxpayer became bad debts. The taxpayer claimed an ABIL, arguing that the loans had been made to the individual as an agent or `alter ego` of the corporation, so that they were really made to the corporation rather than Austin. The CRA disagreed and disallowed the ABIL claim.
On appeal, the Tax Court of Canada judge sided with the CRA. The judge sympathized with the taxpayer and believed that the loans were intended to help fund the corporation`s business. But the fact of the matter was that the taxpayer made out the cheques (for the loans) to Austin personally, and not to the corporation, and evidence was insufficient to show that Austin was acting as agent of the corporation when he accepted the cheques.
The taxpayer has appealed the decision to the Federal Court of Appeal. However, given the Tax Court’s findings of fact, it is very unlikely the Court of Appeal will reach a different decision.