18 October 2002 External T.I. 2002-0164755 - Stop Loss Rules

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Comments on application of subsections 40(3.3) and 40(3.3)(3.4) to a particular fact situation.

Position: General comments provided.

Reasons: As noted above.

XXXXXXXXXX 2002-016475

October 18, 2002

Dear XXXXXXXXXX:

Re: Stop-Loss Rules

This is in response to your facsimile dated September 24, 2002 and our telephone conversation (Cooke/XXXXXXXXXX) on October 17, 2002 wherein you requested our written comments regarding the application of the stop-loss rules of subsections 40(3.3) and (3.4) of the Income Tax Act ("the Act") as such rules pertain to the fact situation described in your facsimile.

Since your request relates to a proposed transaction involving specific taxpayers confirmation of the income tax consequences of such proposed transactions can only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R5 (IC-70-6R5) dated May 17, 2002. However, we can offer the following general comments.

Subsections 40(3.3) and (3.4) operate to defer the recognition of capital losses on certain dispositions of non-depreciable capital property. Where the conditions set out in subsection 40(3.3) are satisfied, subsection 40(3.4) deems the transferor's capital loss, if any, from the disposition to be nil (the "denied loss") until the earliest of several possible events described in subsection 40(3.4) occur. Subsection 40(3.3) provides that subsection 40(3.4) applies when:

(a) a corporation, trust or partnership disposes of a particular capital property;

(b) during the period that begins 30 days before and ends 30 days after the disposition, the transferor or a person affiliated with the transferor acquires a property that is, or is identical to, the particular property; and

(c) at the end of the period, the transferor or a person affiliated with the transferor owns a property that is, or is identical to the particular property.

When these stop-loss rules apply, generally the transferor's denied loss will only become available for deduction by the transferor when the particular property (or an identical property substituted for such property) is no longer held by the transferor or a person who is affiliated with the transferor.

Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R5.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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