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: Whether a taxpayer can transfer unrealized/realized capital losses to the taxpayer's spouse.
Position: Yes, in certain situations.
Reasons: Where the taxpayer's spouse still holds the substituted property at the end of 30 days following the taxpayer's disposition, the superficial loss rules will deny the taxpayer's capital loss and the denied loss will be added to the adjusted cost base of the spouse's capital property by virtue of paragraph 53(1)(f) of the Act. The attribution rules must not be applicable for the transfer of losses to be effective.
Karen Power, CA
May 27, 2003
Re: Superficial Losses
We are writing in reply to your letter of April 26, 2003, wherein you requested our comments on the application of the provisions of the Income Tax Act (the "Act") in the following situation.
Mr. X owns shares of ABCco, the adjusted cost base of which is $100,000. The fair market value of these shares is currently $5,000. Mr. X no longer wishes to hold the shares and plans on selling the shares as soon as possible. Mr. X has not reported any capital gains in the previous three taxation years and does not anticipate any capital gains for a number of years in the future. Consequently, the loss that will result from the future disposition of the ABCco shares is of little value to Mr. X. Mr. X's wife Mrs. X, on the other hand, has substantial capital gains to report for the current taxation year and would like to make use of Mr. X's accrued losses. In order to transfer Mr. X's unrealized capital losses to Mrs. X using the superficial loss rules, it is proposed that Mrs. X will purchase the ABCco shares from Mr. X at fair market value and Mr. X would elect out of subsection 73(1) of the Act, or alternatively Mrs. X will acquire the same number of ABCco shares on the open market within the period referred to in paragraph (a) of the definition of superficial loss in section 54 of the Act. Mrs. X would use her own funds to acquire the shares. Mrs. X would sell her newly acquired shares only after a 31-day period had elapsed from the date Mr. X disposes of the ABCco shares.
Your request appears to relate to a particular proposed 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 70-6R5 dated May 17, 2002. However, if the situation relates to a completed transaction a request for the Canada Customs and Revenue Agency's ("CCRA") views must be made to your local Tax Services Office. We can, however, provide the following general comments.
The CCRA has previously commented on a very similar situation in document # E2001-0100155 dated January 7, 2002. We have enclosed a copy of this document for your files.
Document # E2001-0100155 deals specifically with a situation in which a taxpayer purchases the shares from their spouse rather than purchasing the identical shares on the open market. Where the shares are purchased on the open market, the provisions of subsection 73(1) of the Act would have no application, however the application of the superficial loss rules as contained in section 54 and paragraphs 40(2)(g) and 53(1)(f) of the Act would be consistent with the comments contained in document E2001-0100155. Furthermore, these comments are consistent with your understanding of the provisions.
Please note that under both alternatives suggested above, the transfer of capital losses between spouses will only be effective where the attribution rules contained in subsection 74.2(1) of the Act do not apply.
We trust our comments will be of assistance to you.
Milled Azzi, CA
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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