CRA Reference (archived)

• IT-159R3 – Capital Debts Established to be Bad Debts (CRA)
• IT-442R – Bad Debts and Reserves for Doubtful Debts (CRA)

CRA Technical Interpretation

In May 2024, the Canada Revenue Agency ("CRA") provided goPeer with a written technical interpretation regarding tax reporting for peer-to-peer lending. Key excerpts include:

This technical interpretation provides general comments about the provisions of the Income Tax Act (the “Act”) and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R12, Advance Income Tax Rulings and Technical Interpretations.

The tax consequences relating to the above-described arrangements depend on the legal relationships created among the persons under the relevant agreements. The particular facts related to any transaction undertaken by a taxpayer under such arrangements would also need to be considered in determining the tax consequences that may apply. In this regard, a taxpayer may wish to seek professional tax advice. We are prepared however, to provide the following general comments.

 

Uncollectible or doubtful loans
The determination of whether a loss in respect of a particular debt or loan may be deducted in computing a taxpayer's income from a business or property or, alternatively, as a capital loss is a mixed question of fact and law.

 

Reserve for doubtful or impaired debts
In general terms, a taxpayer that is a financial institution or whose ordinary business includes the lending of money may deduct, pursuant to and within the limits described in subparagraph 20(1)(l)(ii) of the Act, a reserve in respect of impaired loans and lending assets. In this regard, subparagraph 20(1)(l)(ii) of the Act is an exception to the general prohibition under paragraph 18(1)(e) of the Act against the deduction of contingency reserves.

A reserve claimed by a taxpayer under paragraph 20(1)(l) of the Act for one taxation year must be included in income in the following taxation year pursuant to paragraph 12(1)(d) of the Act. Thus the reserve claimed for a taxation year is always a new reserve and the whole of the reserve is subject to the conditions specified in paragraph 20(1)(l) of the Act, and not merely any increase in the reserve as it may appear in the taxpayer's accounts.

 

Bad Debts
Generally, a taxpayer who is an insurer or whose ordinary business included the lending of money may deduct, under clause 20(1)(p)(ii)(A) of the Act, that part of the amortized cost to the taxpayer at the end of the year, of an uncollectible loan or lending asset, made or acquired in the ordinary course of that business.

For an amount to be deductible under subparagraph 20(1)(l)(ii) or clause 20(1)(p)(ii)(A) of the Act, as the case may be, on the basis that the taxpayer's ordinary business included the lending of money, it is not necessary that the taxpayer be a money-lender within the restrictive meaning that may be given to that term in a governing statute. However, it is not sufficient merely that loans are made; they must be made as an integral part of a business operation. It is required that there be a certain system and continuity in the making of loans, and the purpose must not be the occasional investment of surplus funds, accommodation to friends or customers or advances that are intended to remain a part of the capital of the borrower.

 

Capital debts
Generally, under paragraph 50(1)(a) of the Act, where a taxpayer establishes that an amount receivable on capital account (such as a loan) has become a bad debt in a taxation year, the taxpayer may elect to be deemed to have disposed of the debt at the end of the tax year for nil proceeds and to have immediately reacquired it at a cost of nil. The deemed disposition can result in a capital loss for the year under subsection 39(1) of the Act with any recovery of the debt being a capital gain. Generally, for paragraph 50(1)(a) of the Act to apply in a tax year in respect of a debt owing to a taxpayer, (i) the debt must be owing to the taxpayer at the end of the tax year, (ii) the taxpayer must have established the debt to have become a bad debt in the tax year, and (iii) the taxpayer must elect in their income tax return for the year to have subsection 50(1) of the Act apply in respect of the debt. The time at which a debt becomes a bad debt is a question of fact. Generally, a debt owing to a taxpayer will be a bad debt if

• the taxpayer has exhausted all legal means of collecting on it; or
• the debtor has become insolvent and has no means of repaying it.

Under subparagraph 40(2)(g)(ii) of the Act, a taxpayer's loss arising from the disposition of a debt is nil unless (i) the debt had been acquired by the taxpayer for the purpose of gaining or producing income from a business or property; or (ii) acquired as consideration from the disposition of capital property in an arm's length transaction.

Further information on paragraph 50(1)(a) and subparagraph 40(2)(g)(ii) of the Act is available in Income Tax Folio S4-F8-C1, Business Investment Losses, available on our website at www.cra-arc.gc.ca.