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 an estate which has de facto control of a corporation an affiliated person for the purposes of subsection 40(3.6)?
Position: Yes.
Reasons: Affiliated by virtue of subparagraph 251.1(1)(b)(i).
2000-006250
XXXXXXXXXX Karen Power, C.A.
(613) 957-8953
March 6, 2001
Dear XXXXXXXXXX:
Re: Subsections 40(3.6) and 164(6)
We are writing in reply to your letter of December 5, 2000 wherein you requested our opinion regarding the application of the stop-loss rule found in subsection 40(3.6) of the Income Tax Act (the "Act") in the context of a redemption of shares by an estate and a carry back of losses pursuant to subsection 164(6) of the Act.
The situation in your letter may be briefly restated as follows:
1. An estate has 3 executors, none of whom are affiliated with each other. None of the executors are beneficiaries in the estate and none of the executors are related to each other.
2. The estate holds non-voting preferred shares of a company "Holdco". These shares had significant accrued gains which were realized on the terminal return of the deceased.
3. The estate also indirectly controls Holdco. This control is exercised by means of control of a corporate trustee which is the trustee of all of the voting shares of Holdco. For purposes of your situation, you have assumed that the estate has at least de facto control of Holdco.
4. The estate will cause the redemption of the preferred shares of Holdco, creating a loss in the estate that would be carried back to the terminal return of the deceased under subsection 164(6) of the Act.
You have requested that we provide comments confirming that subsection 40(3.6) would not apply in the above situation to deny the loss to the estate on the redemption of the preferred shares.
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 70-6R4 (IC-70-6R4) dated January 29, 2001. 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 general comments.
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.
In the situation you describe, even though the executors are non-affiliated, the estate would be affiliated with Holdco under subparagraph 251.1(1)(b)(i) as the estate has de facto control over Holdco. Consequently, the amount of any capital loss arising on the redemption of the shares owned by the estate would be denied pursuant to subsection 40(3.6) of the Act.
We trust our comments will be of assistance to you. These comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R4.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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