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.
Principal Issues: In the situation where an estate does not itself have de facto control over a corporation, but the corporation is controlled by the related group consisting of the trustees of the estate, whether the estate would be affiliated with the corporation?
Position: No.
Reasons: None of the trustees of the estate is affiliated with another.
1999-001082
XXXXXXXXXX Daniel Wong
(613) 954-4949
Attention: XXXXXXXXXX
February 22, 2000
Dear Sirs:
Re: Subsections 40(3.6) and 164(6) of the Income Tax Act (the "Act")
This is in reply to your facsimile letter of August 18, 1998 wherein you requested a technical interpretation with respect to the application of subsections 40(3.6) and 164(6) of the Act to the situations described in your letter.
Your first query involves the situation where an individual, A, dies while owning redeemable, retractable, voting preferred shares (the "freeze shares") of a private corporation ("Holdco"). A's estate will own sufficient freeze shares that it will control Holdco following the time of A's death. The common shares of Holdco are owned equally by A's children. A's children are also the executors of A's estate. Following the redemption of the freeze shares, you would like to know whether the estate would be affiliated with Holdco.
Your second query is whether in the situation described above the estate would be considered to have de facto control over Holdco where all or a portion of the redemption proceeds represents indebtedness of Holdco to the estate having a 5 year term and a market rate of interest.
Your final query relating to the above situation involves the potential application of subsection 40(3.6) to deny the capital loss realized by the estate on the redemption of its Holdco freeze shares where the estate's beneficiaries acting in their personal capacities borrow funds from a financial institution and lend those funds to Holdco. These loans could either be for a 5 year term bearing a market rate of interest or payable on the demand of the holder. Holdco would then use these funds to redeem the freeze shares held by the estate. The estate would immediately distribute to each beneficiary sufficient cash to repay the beneficiary's loan from the financial institution. The beneficiaries would then repay the loans owing to the financial institutions.
In the situations described above, the estate will be deemed under subsection 84(3) to have received a taxable dividend to the extent that the proceeds of disposition of the freeze shares exceed their paid-up capital. The estate will also incur a capital loss in respect of the disposition of the Holdco freeze shares to the extent that their paid-up capital is less than their adjusted cost base to the estate. In your view, subsection 40(3.6) will not apply to deny the capital loss realized by the estate such that the capital loss may be carried back to the deceased's terminal return pursuant to subsection 164(6) of the Act. In your view, subsection 245(2) would not be applicable to recharacterize these tax consequences.
The situation described in your letter appears to involve actual proposed transactions relating to specific taxpayers. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R3 issued on December 30, 1996. However, we can offer the following general comments which we hope will be of assistance to you.
Subsection 40(3.6) will deny a loss incurred by a taxpayer on the disposition of a share of a corporation if the taxpayer, immediately after the disposition of the share, is affiliated with the corporation. Affiliated persons or persons affiliated with each other are defined in subsection 251.1(1) of the Act. Pursuant to paragraph 251.1(1)(b) a person is affiliated with a corporation if
(a) the person controls, directly or indirectly in any manner whatever, the corporation;
(b) the person is a member of an affiliated group of persons which controls, directly or indirectly in any manner whatever, the corporation; or
(c) the person is the spouse of a person described in (a) or (b).
The determination of whether a corporation is controlled, directly or indirectly in any manner whatever, by a particular person, including a trust, can only be made following a review of all of the relevant facts relating to a particular situation. The general views of the Canada Customs and Revenue Agency (the CCRA) on this topic are set out in paragraphs 15 to 19 of Interpretation Bulletin IT-64R3.
In the situation where an estate, which has more than one trustee none of whom is affiliated with another, does not itself have de facto control over a corporation, but the corporation is controlled by the related group consisting of the trustees, the estate would not normally be affiliated with the corporation as it is not a person described in (a), (b) or (c) above.
Whether the holding of a debt of a corporation will result in the creditor having de facto control over the corporation can only be determined following a review of all of the facts relating to the particular situation. Although it would normally be expected that the holding of a debt that is not payable on demand will not, in and by itself, result in de facto control over the corporation, the final determination can only be made based on the facts of a particular situation.
The application of subsection 245(2) of the Act to any particular situation can only be determined following a review of all of the relevant facts pertaining to that situation. However, it is the general view of the CCRA that where the potential application of a provision of the Act, such as subsection 40(3.6) is based on whether a particular person has de facto control over a corporation and the facts of a case do not indicate that such de facto control is present, GAAR will not be applicable.
The above comments represent our general views with respect to the subject matter of your letter and are provided in accordance with paragraph 22 of Information Circular 70-6R3.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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