Principal Issues: Ms. A and her spouse, Mr. B, each hold 50% of the common shares of the capital stock of OPCO, which is a CCPC. Ms. A also holds preferred shares of the capital stock of OPCO. The fair market value, paid-up capital and adjusted cost base (hereinafter "ACB"), to Ms. A of her OPCO preferred shares are, respectively, $2,000,000, $200 and $1,000,000. Ms. A transfers to Mr. B half of her OPCO preferred shares for no consideration. This transfer is made on a tax-deferred basis pursuant to subsection 73(1). Five years later, OPCO redeems the preferred shares of its capital stock held by Mr. B. At this particular time, Mr. B is deemed to have received a dividend pursuant to subsection 84(3) in the amount of $999,900. This deemed dividend is deemed to be Ms. A's dividend pursuant to subsection 74.1(1). At the same time, Mr. B also incurs a loss in the amount of $499,900. Whether the attribution rules would apply to the loss incurred by Mr. B.
Position: The loss incurred by Mr. B would be deemed to be nil pursuant to paragraph 40(3.6)(a). Consequently, there would be no allowable capital loss that could be attributed to Ms. A under subsection 74.2(1). The loss, determined without reference to paragraph 40(2)(g) and subsection 40(3.6), would be added to the ACB to Mr. B of his common shares of the capital stock of OPCO pursuant to paragraph 40(3.6)(b).
Reasons: According to the law.
