2 March 2000 External T.I. 1999-0015705 - Affiliated persons and stop loss rules

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: Is the trust an affiliated person with a corporation personally controlled by the trustee where the trustee is the sole trustee of the trust for the purposes of subsection 40(3.6)?

Position: Yes

Reasons: The law

XXXXXXXXXX 		1999-001570

Attention: XXXXXXXXXX

March 2, 2000

Dear Sirs:

Re: Affiliated Persons and Stop Loss Rules

This is in reply to your letter of December 15, 1999 wherein you requested our opinion on the application of subsection 40(3.6) of the Income Tax Act ("the Act") in the following situation.

In your letter you indicate that Mr. A owns all the voting shares of a corporation ("Aco") while an inter vivos trust ("Trust") owns all the preferred shares of Aco. Mr. A is the sole trustee of the Trust. You advise that if Aco were to redeem some of its preferred shares the Trust would, but for the issue in question and discussed below, realize a capital loss on the disposition of the preferred shares that would not otherwise be denied under subsection 40(3.6) of the Act.

It is your view that since Mr. A already controls Aco, the Trust would not for the purpose of the definition of affiliated persons in subparagraph 251.1(1)(b)(ii) of the Act be considered to be a member of a group that controls Aco, and as such, the Trust and Aco would not be considered as affiliated persons. If the Trust and Aco are not affiliated persons it is your view that subsection 40(3.6) of the Act would not apply to deem the capital loss incurred by the Trust on the redemption of the preferred shares of Aco to be nil and you ask that we confirm that your views are correct.

Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R3 (IC-70-6R3) dated December 30, 1996. However, if the situation relates to a completed transaction a request for the Canada Customs and Revenue Agency's views must be made to your local Tax Services Office. We can, however, provide the following comments.

We do not agree with your conclusion. Mr. A, as owner of all of the voting shares of Aco, would be an "affiliated person" with Aco by virtue of subparagraph 251.1(1)(b)(i). Further Mr. A, as sole trustee of the Trust, is the legal owner of the preferred shares of Aco. By virtue of subparagraph 251.1(4)(a) Mr. A as trustee of the Trust would be an affiliated person with himself as controller of Aco. In our view, these conclusions are supported by the decisions reached in the cases of H. A. Fawcett & Son Limited 80 DTC 6195 (FCA), Consolidated Holding Company Limited 72 DTC 6007 (SCC) and Lusita Holdings Limited 84 DTC 6346 (FCA).

Based on this analysis, it is our view that the amount of any capital loss arising on the redemption of the preferred shares of Aco owned by the Trust will be denied pursuant to subsection 40(3.6) of the Act. By virtue of paragraph 40(3.6)(b) the denied loss would be added to the adjusted cost base of any remaining preferred shares owned by it.

Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R3.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
- 4 -