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 a corporation, all the shares of which are owned equally by four trusts and with each trust having the same corporate trustee, an affiliated person vis a vis each trust for the purposes of subsection 40(3.6) after the redemption of some or all of the shares held by only one trust?
Position: Yes.
Reasons:
Affiliated by virtue of subparagraph 251.1(1)(b)(i) and paragraph 251.1(4)(a). See for example, specific rules in subsections 256(4) and 256(5) of the Act that were required to prevent two or more corporations from being associated where they are otherwise controlled by the same trustee/executor. There is no similar relief in the affiliated person rules.
XXXXXXXXXX 2000-007414
March 30, 2001
Dear XXXXXXXXXX:
Re: Subsection 40(3.6) of the Income Tax Act (the "Act")
We are writing in reply to your letter of March 9, 2001 wherein you requested our opinion regarding the application of the stop-loss rule found in subsection 40(3.6) of the Act in the context of a redemption of shares of a corporation that are held in a trust.
The situation in your letter may be briefly restated as follows:
1. Mr. X, a Canadian resident, has four adult children, being A, B, C, and D.
2. Each of A, B and C and each of their respective spouses and minor children are non-residents of Canada. D and D's spouse and minor children are Canadian residents.
3. Mr. X establishes four discretionary trusts, one for the benefit of each of A, B, C and D and that particular child's family. A trust company is the sole trustee of each of the trusts.
4. Each trust owns 25% of the common shares in a corporation ("Investco"). These common shares represent all the shares issued by Investco and under the terms of the shares the holder has the right to have all or any part of their shares redeemed as long as proper notice is given.
You have requested that we provide comments confirming that subsection 40(3.6) of the Act would not apply to deny a capital loss where the common shares of Investco held by one of trusts created for the benefit of Mr. X's children are redeemed.
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) of the Act will deny a loss incurred by a taxpayer on the disposition of a share of the capital stock of a corporation to the corporation if the taxpayer, immediately after the disposition, is affiliated with the corporation. The rules for determining whether a corporation and a person are affiliated persons are contained in section 251.1 of the Act. Under those rules a person is deemed to be affiliated with themselves pursuant to paragraph 251.1(4)(a) of the Act.
In the situation you describe, the sole trustee of each trust would be deemed to be affiliated with itself pursuant to paragraph 251.1(4)(a) of the Act. Since the corporate trustee controls Investco, Investco would be affiliated with each trust under subparagraph 251.1(1)(b)(i) of the Act. Therefore, immediately after the redemption of some or all of the common shares of Investco held by one of the trusts, that trust would still be affiliated with Investco for the purposes of subsection 40(3.6). Consequently, the amount of any capital loss arising on such a redemption would be denied and added to the adjusted cost base of the remaining common shares of Investco, if any, that are held by the particular trust.
Our comments are provided in accordance with the practice outlined in paragraph 22 of IC-70-6R4.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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