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:
Will a previous administrative position concerning the application of the superficial loss rules contained in section 54 be extended to subsection 40(3.4)?
Position: Yes.
Reasons:
Since the wording and intent of both the superficial loss rules contained in section 54 and the suspended loss rules contained in subsection 40(3.4) are very similar, the administrative practice should be extended to subsection 40(3.4).
2001-008815
XXXXXXXXXX Karen Power, C.A.
(613) 957-8953
July 4, 2001
Dear XXXXXXXXXX:
Re: Subsection 40(3.4)
We are writing in reply to your letter of June 12, 2001 wherein you request our views on whether the administrative position outlined in a previous technical interpretation (document #9203795) can be extended to a capital loss denied by virtue of subsections 40(3.3) and 40(3.4) of the Income Tax Act (the "Act").
You have outlined a situation where a trust (the "Taxpayer") purchased 100 common shares of XYZ Co. on January 1, 2000. The Taxpayer then sold 99 common shares of XYZ Co. on January 25, 2000, incurring a capital loss of $1,000 on the sale. The Taxpayer had no other purchases or dispositions of the common shares of XYZ Co. during the period that begins 30 days before and ends 30 days after the January 25 disposition.
Subsections 40(3.3) and (3.4) of the Act operate to defer the recognition of losses on certain dispositions of non-depreciable capital property. Where the conditions set out in subsection 40(3.3) are satisfied, subsection 40(3.4) deems the transferor's loss, if any, from the disposition to be nil until the earliest of the events described in that provision occur. Subsection 40(3.3) provides that subsection 40(3.4) applies when:
(a) a corporation, trust or partnership disposes of a particular capital property;
(b) during the period that begins 30 days before and ends 30 days after the disposition, the transferor or a person affiliated with the transferor acquires a property that is, or is identical to, the particular property; and
(c) at the end of the period, the transferor or a person affiliated with the transferor owns a property that is, or is identical to the particular property.
As you have indicated, in the hypothetical situation you have described, a strict interpretation of subsections 40(3.3) and 40(3.4) would deem the entire capital loss to be nil. However, the Canada Customs and Revenue Agency is prepared to administratively apply the following algebraic formula to determine which portion of the capital loss should be denied under subsection 40(3.4) of the Act:
DL = (least of S, P, and B) / S x L
where
DL is the amount of loss deemed to be nil;
S is the number of items disposed at that time;
P is the number of items bought in the 60 day period;
B is the number of items left at the end of the period; and
L is the loss on the disposition as otherwise determined.
We trust that 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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