CRA applies its view that a contribution of FA1 shares to FA2 causes the FA2 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.”

The 2016 IFA Roundtable dealt with a contribution Canco made to a foreign subsidiary (FA2) of its shares of a non-resident Finco subsidiary (FA1 – which previously had paid exempt dividends to Canco). CRA found 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, on the grounds that the shares of FA2 were substituted shares for those of FA1. This was so even though the contribution did not entail any exchange of property and even though the FA1 shares likely would never have generated an accrued loss (given that its asset was an interaffilate loan).

This answer was a foreshadowing of an internal technical interpretation (i.e., dealing with an actual audit situation involving Luxcos) which CRA issued on June 22.

Neal Armstrong. Summary of 22 June 2016 Internal T.I. 2016-0632821I7 Tr under s. 93(2.01).