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: examination of two separate scenarios involving trusts, affiliated rules & stop loss provisions
Position: In both scenarios presented the loss would be denied
Reasons: Where the trust controls the estate/trust before & after a redemption of shares, it is the trust that is affiliated regardless of the fact that the trustees are not affiliated.
2000-002477
XXXXXXXXXX L. Holloway
(613) 957-2104
February 23, 2001
Dear XXXXXXXXXX:
Re: Request for Technical Interpretations
Subsection 40(3.6) and section 251.1 of the Income Tax Act
This is in response to your letter requesting a technical interpretation on the operation of subsection 40(3.6) and the definition of affiliated in section 251.1. We apologize for the delay in our response. The two situations outlined in your letter follow:
Situation 1
1. A spousal trust owns the majority of the voting common shares of Company A and Company B. The shares have nominal paid-up capital for income tax purposes.
2. The trust is a qualifying spousal trust for the purposes of the Act.
3. The income beneficiary of the spousal trust is the spouse; the capital beneficiaries on the death of the spouse trust are the spouse's son, Mr. X and her daughter.
4. The trustees of the spousal trust are the spouse and Mr. X. When the spouse passes away, the sole trustee becomes Mr. X.
5. The spouse has recently passed away.
6. The spousal trust continues to exist after the death of the spouse beneficiary.
7. There are significant accrued gains on the shares owned by the spousal trust in Company A and Company B. These gains are realized as a result of the death of the spouse beneficiary.
8. Mr. X personally owns the remaining voting common shares of Company A and Company B.
9. Company A and Company B are to redeem sufficient shares to create a capital loss in the spousal trust to offset the capital gain that arose on the death of the spouse beneficiary. After the redemption, the spousal trust no longer has voting control of either company.
Situation 2
10. Brother and sister are the co-executors of an Estate.
11. The Estate owns all the issued and outstanding voting preference shares and all the issued and outstanding voting common shares of Company C. All of the shares have nominal paid-up capital for income tax purposes.
3. The common shares held by the Estate had significant accrued gains that were realized on the date of death return of the deceased. The preferred shares had no gain due to a crystallization completed in a prior year.
4. Another brother owns the non-voting common shares.
5. Company C will redeem all the voting common shares from the Estate, creating a loss in the Estate that would be carried back to the date of death return under subsection 164(6).
In your opinion, in order to obtain the correct tax result and avoid double taxation, the executors or trustees should be seen to hold shares in different capacities, if applicable, and therefore their personal holdings should not effect the tax consequences to an estate or trust. Under this interpretation, neither the loss in situation 1 or 2 would be denied.
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.
We have recently issued technical interpretations on the interaction of subsections 40(3.6) and 251.1(1) where a trust or estate is also involved. These documents which are available through the various tax data services (see our document numbers 1999-001080, 1999-001082, and 1999-001570) basically state the following:
1. Where an estate, which has more than one executor none of whom is affiliated with another, does not itself have control over a corporation, but the corporation is controlled by a related group consisting of the executors, the estate would not normally be affiliated with the corporation as it is not a person described in (a), (b) or (c) of the definition of affiliated person. This response assumes that under the terms of the will any decision requires majority approval by the executors.
2. In the situation where Mr. A owns all of the voting common shares of a corporation ("Aco") and an inter vivos trust ("Trust") owns all the non-voting preferred shares of Aco; if Aco were to redeem some of the preferred shares of the Trust the loss would be denied under subsection 40(3.6). As Mr. A owns all the voting shares of Aco, he would be a person affiliated with Aco by virtue of subparagraph 251.1(1)(b)(i). Further, as sole trustee of the Trust, Mr. A is the legal owner of those shares. By virtue of paragraph 251.1(4)(a), Mr. A as trustee is affiliated with himself as controller of Aco. Therefore the amount of any capital loss arising on the redemption of the preferred shares would be denied pursuant to subsection 40(3.6).
Based on these previous interpretations we offer the following comments on the situations presented in your letter.
In situation 1, as Mr. X owns all the remaining voting shares of Companies A and B, he would be affiliated with both companies by virtue of subparagraph 251.1(1)(b)(i). Furthermore, as paragraph 251.1(4)(a) provides that persons are affiliated with themselves, Mr. X as sole trustee of the trust would be affiliated with himself as the person controlling Companies A and B. Given this interpretation, the amount of any capital loss arising on the redemption of the shares owned by the trust would be denied pursuant to subsection 40(3.6).
In situation 2, even though the executors are non-affiliated, we would consider the Estate to be affiliated with the corporation under subparagraph 251.1(1)(b)(i) as the Estate has control over the corporation. Again in this second case, the loss would be denied.
The interpretation of section 251.1 as it relates to estates and trusts is not entirely clear.
It is, however, our understanding that the Department of Finance is aware of the ambiguities associated with the affiliated rules in this regard and has noted that amending legislation may be required.
We trust the above is of assistance.
Yours truly,
T. Murphy
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2001
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2001
Email this Content