Many of us lend money to our friends and family if they are in need. We often don’t consider the tax consequences associated with it if the loan is not repaid. The information below briefly consists of several ways to approach this situation if you are a money lender or provided a loan to a corporate/small business.
Capital Loss Election
Suppose you are within the money-lending business and are treating the loan to your friends/family professionally. In that case, you have rights as a creditor to receive a loan repayment is taken into account a capital property. If a loan becomes uncollectible, you can consider it to dispose of for nil proceeds hence triggering a financial loss on your taxes. You can then use that loss to offset any capital gains you earned either within the same taxation year or in any future year.
To preserve your ability to claim a capital loss on a loan to your family/friends, the loan must be interest bearing. The rate of interest is often nominal, and report the interest earned on your tax return.
Loan to a Corporation
If you lent money to a family/friend’s company, which is a Canadian-controlled private corporation also known as a small business corporation (where 90% or more of its assets are measured by fair market price are used principally in a lively business carried on primarily in Canada), and the loan wasn’t repaid, the financial loss would be considered a business investment loss. In this case, half of the loss could be deducted against the debtor’s income from any source, including capital gains.
The rules here require that either the debtor is a small business corporation at the time election is formed in respect of the loan receivable or at any time within the 12 months before the disposition. Therefore, you should consider the debtor’s corporation’s status to correctly claim the losses on your tax return.
The above information consists of different ways through which you can recover from the loss. But most of us are not money lenders or did not pay attention to the status of the debtor’s company. This is why it is essential to consult a professional tax accountant and lawyer while lending money to avoid negative consequences. We can provide you with in-depth consultation and solutions that can prevent problems that might arise in the future and save you on taxes.