18 February 2002 External T.I. 2001-0112055 - SUPERFICIAL LOSS ON SHARES

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Where an individual disposes of shares to a personal Holdco & Holdco immediately thereafter disposes of same shares to individual's self-directed RRSP will

1) 40(2)(g)(i) apply?

2) 40(2)(g)(iv)(B) apply?

3) GAAR applicable?

Position:

1. No.

2. No.

3. Possible

Reasons:

1. Holdco is affiliated with individual but does not retain shares for 30 days
2. Holdco is not the annuitant of the RRSP
3. See Q41 of CTF 1989 round table-by inference- GAAR should apply

		2001-011205
XXXXXXXXXX  	L. Holloway
		613-957-2104
February 18, 2002

Dear XXXXXXXXXX:

Re: Technical Interpretation Request - Loss on transfer of Shares to RRSP

This is in reply to your letter of November 15, 2001 requesting a written opinion on specific proposed transactions in respect of your client's self-directed RRSP. The particular circumstances in your letter on which you have asked for our views appear to be a factual situation. As explained in Information Circular 70-6R4 issued by Canada Customs and Revenue Agency ("CCRA") on January 29, 2001, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. If you which to obtain a binding commitment with respect to an actual case similar to that outlined in your letter, an advance income tax ruling application should be submitted.

All references herein are to the Income Tax Act (Canada) (the "Act") unless otherwise indicated.

Your letter outlined a scenario whereby an individual, Mr. A, owns publicly traded shares that have declined in value. Mr. A is also the sole shareholder of a private investment holding company, Holdco and he is also the annuitant of a self-directed RRSP. Mr. A wishes to realize his loss on the publicly traded shares so he is proposing to sell these shares to Holdco. If Holdco retains these shares within the time frame set out by the definition of superficial loss in section 54, the loss would be denied by virtue of subparagraph 40(2)(g)(i). It is intended that Holdco will dispose of these same shares immediately to Mr. A's RRSP, thereby avoiding the application of subparagraph 40(2)(g)(i). If Mr. A were to transfer those same shares to his RRSP directly, his loss would be denied by clause 40(2)(g)(iv)(B). Your letter asked for our interpretation of subparagraph 40(2)(g)(i), clause 40(2)(g)(iv)(B) and the application of the general anti-avoidance rule (GAAR) to the above situation. Although we are unable to provide any binding assurance with respect to the interpretations requested, we do provide the following general comments for your information.

Our Comments

It would appear that the transactions described in your letter might reasonably be considered to be arranged primarily to avoid the consequences of clause 40(2)(g)(iv)(B) that would otherwise apply on a straightforward transfer directly to the individual's RRSP. Where it can reasonably be considered that such avoidance transactions have not been undertaken primarily for bona fide purposes other than to obtain the tax benefit, subsection 245(2) may be applicable. However, as explained in Information Circular-88-2 paragraph 2, should you wish a binding response, the CCRA will issue advance rulings with respect to the application of the general anti-avoidance rule to proposed transactions where such a request is submitted in accordance with Information Circular 70-6R4.

You may also wish to refer to Question 41 of the 1989 Canadian Tax Foundation Conference, Revenue Canada Round Table, where we indicated that GAAR would not apply in a particular situation involving the superficial loss rules. In that scenario the acquiring taxpayer acquired the property on the 31st day in order to avoid subparagraph 40(2)(g)(i), however since that "transaction would have been subject to the scrutiny of a specific provision of the Act but would clearly be outside its stated ambit, it would not result in a misuse of particular provisions of the Act or an abuse, having regard to the provisions of the Act read as a whole." We therefore concluded, "subsection 245(2) of the Act would not apply to this transaction owing to the application of the relieving exception in subsection 245(4)." In the situation outlined in your letter, the transactions would all occur within the period beginning 30 days before the disposition and ending 30 days after the disposition. By inference, the relieving exception in subsection 245(4) may not apply to your situation.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R4, the above comments do not constitute an income tax ruling and accordingly are not binding on the CCRA.

We trust the above comments are of assistance to you.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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