Tax Tip[] Losses

Claiming Capital Losses

“It may be advisable for the lender to charge a reasonable rate of interest.”

When someone suffers a loss on a loan to an individual or a corporation, they may assume that the loss will be deductible for income tax purposes.

Generally, a loss on a loan is deductible, as either a capital loss or a business investment loss, only if the loan was made to earn income. The same principles apply to payments made to honour a loan guarantee. For the payment to create a deductible loss, there must be a guarantee fee.

The Canada Revenue Agency has an administrative position of allowing losses on low or non-interest bearing loans (or on payments of guarantees for which no guarantee fee was received), where the creditor or guarantor is a shareholder. This position does not apply where the creditor is only related to the shareholder. For example, if a parent makes an interest-free loan to a child’s business, a loss on the loan would not usually be deductible by the parent.

In these types of situations, it may be advisable for the lender to charge a reasonable rate of interest on the loan (or a reasonable fee in the case of a guarantee) to preserve the lender’s ability to claim a tax deduction in the event that a loss is suffered.

Interest accrued on the anniversary date of the loan must be reported for tax purposes each year, even if the interest is not received. However, a bad debt deduction can be claimed if the interest is uncollectable. The interest income and the bad debt expense should both be reported on the taxpayer’s income tax return. Similarly, where a guarantee fee is charged, a bad debt deduction may be claimed if the guarantee fee becomes uncollectable.

It may be worthwhile to file T1 adjustment requests if the income and expense have not been reported for prior years those years.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Terminal Losses For Estates

“Terminal losses in the first year of an estate can be applied in a terminal return..”

Many practitioners are aware that capital losses incurred within the first year after an individual passes away can be carried back to offset capital gains reported in the terminal return. One of the rules that is not so well known is that a terminal loss can also be carried back and applied against income reported in the terminal return. If there is a terminal loss on the disposition of depreciable property, it can be applied against all income reported in the terminal return. A capital loss carried back can only be applied against capital gains.

For there to be a terminal loss within the first year following the passing of the individual, a depreciable property would have to decline in value from the date of death. This does not occur often. However, there have been occasions when, for example, real estate has declined in value significantly over a short period. It is important to bear this in mind in situations where the value of an asset of the estate may have decreased significantly within one year of the individual passing away. As with the capital loss carryback, the terminal loss carryback is provided for by subsection 164(6) of the Income Tax Act and a filing is required in the prescribed manner.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.