Commentary on Sections Overview Overview Section 406: Effect of recovery of capital in the case of some loans
1141.This section deals with what happens if an individual to whom the loan was made recovers any capital from the business entity in which the investment was made. It is based on section 363(1) of ICTA.
1142.Rules in the particular provisions concerned (eg section 393(2)) disallow relief completely if any capital is recovered unless this section applies. If this section applies, (and it applies to most recoveries), then relief is only reduced in the proportion that the amount of the recovery bears to the amount of the loan (or, where only part of the loan qualified, to the qualifying part of the loan).
1143.The source legislation restricted the application of this rule to cases where the recovered capital was not applied in making a loan repayment. In cases where the recovered capital was so applied relief was, in strictness, lost completely. The rule has been rewritten to ensure that it applies in all cases where capital is recovered. See Change 74 in Annex 1.
1144.Subsection (6) makes it clear that this provision applies only if section 407 treats an amount of capital as having been recovered from the business entity.