15 June 1998 External T.I. 9706295 - AFFILIATED PERSONS & ESTATE OF DECEASED

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 Department.

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

970629
XXXXXXXXXX L. Holloway
Trusts Section
Attention: XXXXXXXXXX (613) 957-2104

June 15, 1998

Dear Sirs:

Re: Estate of XXXXXXXXXX

We are writing in response to your letter of February 20, 1997 to a Mr. Henry Zerbin of the Winnipeg Tax Services Office requesting our interpretation of the application of the new stop loss rules with respect to a specific taxpayer’s scenario. The details of your enquiry follow:

					XXXXXXXXXX 

					XXXXXXXXXX 

You have asked if there was any current provision of the Income Tax Act that would prevent or deny the capital loss realized by the estate as a result of the share redemption from being applied to the terminal return of the late XXXXXXXXXX, and can a subsection 164(6) election be made on behalf of the XXXXXXXXXX Trust in order to alleviate its double taxation.

Our Comments:

As per draft legislation (Bill C-28), after April 26, 1995, subsection 85(4) is repealed and subsection 40(3.6) will be applicable where shares are disposed of to a corporation controlled immediately after such disposition by the taxpayer or a person affiliated thereto. If the corporation acquiring its own shares is affiliated with the shareholder immediately after the acquisition, any loss that would otherwise arise with respect to the transaction is denied and the amount of that loss is instead added by paragraph 40(3.6)(b) of the Act to the ACB to the shareholder of other shares owned by it. The concept of “affiliated” is defined in draft subsection 251.1(1) of the Act. Basically:

– two individuals are considered to be affiliated only where they are spouses of one another;

– Corporations are affiliated to three groups of persons:

1. the person who controls the corporation;

2. members of an affiliated group of persons who control the corporation where an affiliated group is a group of persons each member of which is affiliated with every other member; and

lastly the spouses of persons of either of the first two categories.

In the case presented, as control will rest with a non-affiliated group after the redemption of shares, subsection 40(3.6) would not apply to deny the loss triggered by the Estate.

One must also consider section 112 and the recent proposed amendments thereto when trying to determine whether the loss triggered on redemption would be denied and therefore unable to be the subject of a subsection 164(6) election. In particular, as the shares were acquired by the Estate as a consequence of XXXXXXXXXX death, the amount of the loss would be reduced under draft subsection 112(3.2) by the total of

(a) the amount, if any, by which the lesser of

(i) the total of all amounts each of which is a dividend received by the trust on the share in respect of which an election was made under subsection 83(2) where subsection 83(2.1) does not deem the dividend to be a taxable dividend, and

(ii) the loss determined without reference to this subsection minus the total of all amounts each of which is the amount of a taxable dividend

(A) received by the trust on the share,

(B) received on the share and designated under subsection 104(19) by the trust in respect of a beneficiary who is an individual (other than a trust), or

(C) received on the share and designated under subsection 104(19) by the trust in respect of a beneficiary that was a corporation, partnership or another trust where the trust establishes that

(I) it owned the share throughout the 365-day period that ended immediately before the disposition, and

(II) the dividend was received while the trust, the beneficiary and persons not dealing at arm's length with the beneficiary owned in total less than 5% of the issued shares of any class of the capital stock of the corporation from which the dividend was received

exceeds

(iii) where the trust is an individual's estate, the share was acquired as a consequence of the individual's death and the disposition occurs during the trust's first taxation year, 1/4 of the lesser of

(A) the loss determined without reference to this subsection, and

(B) the individual's capital gain from the disposition of the share immediately before the individual's death, and

(b) the total of all amounts each of which is

(i) a taxable dividend, or

(ii) a life insurance capital dividend

received on the share and designated under subsection 104(19) or (20) by the trust in respect of a beneficiary that was a corporation, partnership or trust.

In this particular case, as the only beneficiaries of the Estate are non-trust individuals and we are told there are no capital dividends to be received by the Estate, it would appear that no part of the loss triggered would be denied as parts (a) and (b) of the above equation would be zero.

With respect to the remaining 50% of the shares held by the XXXXXXXXXX Trust, on the date of XXXXXXXXXX death, XXXXXXXXXX, under subsection 104(4) the XXXXXXXXXX Trust will have been deemed to have disposed of each capital property held (other than land or excluded property or depreciable property) or land included in the inventory of the trust for proceeds equal to its fair market value and to have reacquired the property immediately thereafter for an amount equal to that fair market value.

If the Trustees of the XXXXXXXXXX Trust dispose of the shares after the death of XXXXXXXXXX (the spouse beneficiary), any capital loss arising from the disposition would be reduced under draft subsection 112(3.3) in a manner somewhat similar to that outlined above with respect to draft subsection 112(3.2) ((b) would not include life insurance capital dividends). Again, as the only beneficiaries of the XXXXXXXXXX Trust are non-trust individuals and we are told there are no capital dividends to be received by the XXXXXXXXXX Trust, it would appear that no part of the loss would be denied.

A subsection 164(6) election could never be made in respect of any losses incurred by the XXXXXXXXXX Trust as XXXXXXXXXX interest ends upon his death. Any loss triggered by the Trustees of the XXXXXXXXXX Trust would not be triggered in respect of “administering the estate of a deceased taxpayer.”

We apologize for the delay in our response.

Yours truly,

for Director,
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch