5 March 2001 External T.I. 2001-0070795 - Affiliated persons and the 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 controlled by another corporation which is 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: Affiliated by virtue of subparagraph 251.1(1)(b)(i) and paragraph 251.1(4)(a).

		2000-007079
XXXXXXXXXX 	Karen Power, C.A.
(613) 957-8953
March 5, 2001

Dear XXXXXXXXXX:

Re: Affiliated Persons and the Stop Loss Rules

We are writing in reply to your letter of February 9, 2001 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").

The situation in your letter may be briefly restated as follows:

1. Mr. A controls Holdco.

2. Holdco controls Opco.

3. An inter vivos trust owns common and preferred shares of Opco.

4. Mr. A is the sole trustee of the trust.

5. Each preferred share held by the trust has an adjusted cost base of $1,000, a paid-up capital of $1 and a redemption amount of $1,000.

6. Opco redeems one preferred share held by the trust.

7. As a result, the trust will receive a $999 deemed dividend and incur a capital loss of $999.

You have requested that we confirm that subsection 40(3.6) would apply in the above situation to deny the loss to the trust on the redemption of the preferred share.

Our Comments

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 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.

As you have indicated, Mr. A indirectly controls Opco and is, therefore, affiliated with Opco by virtue of paragraph 251.1(1)(b)(i) of the Act. Further Mr. A, as sole trustee of the trust, is the legal owner of the common and preferred shares of Opco held by the trust. 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 Holdco and indirect controller of Opco. Given this interpretation, we would agree that 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) 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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