CRA considers a contribution of shares to a subsidiary causes the subsidiary shares to be substituted property for s. 93(2.01) purposes

The stop-loss rule in s. 93(2.01) applies to grind the capital loss realized on the disposition of a share of a foreign affiliate by the amount of exempt dividends previously received on that share “or on a share for which [it] was substituted.”

CRA considered that this stop loss rule applied where Canco made a contribution of capital to a foreign subsidiary (FA2) of its shares of a non-resident Finco subsidiary which had paid dividends out of its deemed active business income to Canco – so that s. 93(2.01) denied a subsequent capital loss realized on an arm’s length sale of the FA2 shares to the extent of such dividends. This was so even though the contribution did not entail any exchange of property and even though the Finco shares likely would never have generated an accrued loss.

However, CRA stated:

[W]e may be prepared to develop administrative solutions to the extent this could result in double-counting, or the same dividends being counted, or producing two or more losses.

Neal Armstrong. Summary of 26 May 2016 IFA Roundtable, Q. 7 under s. 93(2.01).