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: Whether the "stop-loss" rules will apply to deny the capital loss on repurchase of shares?
Position: Yes.
Reasons: Immediately thereafter, the Estate will be affiliated with corporation. However, this situation may be remedied by a court-ordered rectification of the legal documents,
October 13, 2000
Calgary Tax Services Office HEADQUARTERS
Section 441-3-4 Corporate Reorganizations Section
Room 130, 220 - 4th Street, S.E. F. Francis
Attention: D. Arnason
2000-003110
XXXXXXXXXX (the "Estate")
This is in reply to your memorandum of June 7, 2000, wherein you requested our comments in respect of the application of subsection 40(3.6) of the Income Tax Act (the "Act") to the following factual situation:
(All references herein are references to the Act)
XXXXXXXXXX
The foregoing transactions resulted in the following tax consequences:
- the late XXXXXXXXXX realized a capital gain on the deemed disposition of the XXXXXXXXXX common voting shares of XXXXXXXXXX;
- the repurchase by XXXXXXXXXX of the XXXXXXXXXX common voting shares resulted in a deemed dividend under subsection 84(3) and a capital loss to the Estate.
- the Executors wish to carry back the capital loss, under subsection 164(6), to offset the capital gain realized on the final return of XXXXXXXXXX.
The issue is whether subsection 40(3.6) is applicable to deny the capital loss claimed by the Estate.
LAW
Subsection 40(3.6) is applicable where a taxpayer disposes, to a corporation that is affiliated with the taxpayer immediately after the disposition, of shares of the capital stock of the corporation. Where subsection 40(3.6) is applicable, any loss that would otherwise arise with respect to the transaction is denied and the amount of that loss is added by paragraph 40(3.6)(b) to the adjusted cost base to the shareholder of other shares owned by it in the acquiring company.
TSO Position
It is your position that the Estate is affiliated with XXXXXXXXXX immediately after the repurchase of the XXXXXXXXXX common voting shares since the Estate owned the remaining XXXXXXXXXX common voting shares and was therefore affiliated with XXXXXXXXXX at this time. You assert that the repurchase of the XXXXXXXXXX common voting shares took place before the transfer of the XXXXXXXXXX common voting shares to XXXXXXXXXX. In your view, the documentation submitted verifies this position.
Representatives' position
The representatives state that they completed the post-mortem planning for the Estate which included the partial redemption of the shares of XXXXXXXXXX. They also prepared the documentation for all of the transactions.
The representatives submit that the XXXXXXXXXX Resolution must be taken as one document and that the order within the document is not material since no part of the Resolution would have been passed without the other parts. In the representatives' view, until the signatures were appended to the XXXXXXXXXX Resolution, no part of the transactions can have occurred. Accordingly, there was never a moment in time when the Estate had any control of the remaining shares. Therefore, the representatives argue that, immediately after the XXXXXXXXXX Resolution became effective, control of XXXXXXXXXX would be vested with XXXXXXXXXX in her personal capacity. The representatives submit that, as the solicitors for the Estate, it was their intention that, immediately after the XXXXXXXXXX Resolution, XXXXXXXXXX would control XXXXXXXXXX in her personal capacity only. The representatives conclude that their strategy was based on their opinion that XXXXXXXXXX rights as a beneficiary can be considered separately from her duties as an Executor.
Our Position
Based on our review of the legal documents submitted (particularly the XXXXXXXXXX declaration that the Estate owned XXXXXXXXXX common voting shares of XXXXXXXXXX), we share your view that the repurchase of the XXXXXXXXXX common voting shares of XXXXXXXXXX occurred prior to the transfer of the XXXXXXXXXX common voting shares to XXXXXXXXXX. Consequently, we concur that, immediately after the repurchase of the shares, the Estate controlled XXXXXXXXXX and was affiliated with it. Subsection 40(3.6) will therefore apply to the capital loss realized on the repurchase of the XXXXXXXXXX common voting shares.
You also request our comments on the application of subsection 40(3.6) where the repurchase of the XXXXXXXXXX common voting shares occurred after the transfer of the XXXXXXXXXX common voting shares to XXXXXXXXXX. It continues to be our position that subsection 40(3.6) will not generally apply where all the shares of a corporation held by an estate are disposed of to the corporation which, immediately following the disposition is controlled by the legal representative of the estate in his personal capacity, unless, immediately after the disposition the corporation is controlled, directly or indirectly in any manner whatever (as defined in subsection 256(5.1)) by the estate (we assume that you share our views that the demand promissory note issued as consideration would not result in the Estate having factual control of XXXXXXXXXX).
Based upon our review of the documents, it appears that the parties intended to have the repurchase of the XXXXXXXXXX common voting shares and the distribution of the XXXXXXXXXX common voting shares to the beneficiary occur at the same time but that the documents executed did not reflect this intention. For this reason, this may be a situation which could be remedied through a court-ordered rectification.
If you require any further assistance, please contact the writer.
for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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