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.
XXXXXXXXXX 2003-004134
Annemarie Humenuk
December 4, 2003
Dear XXXXXXXXXX:
Re: Taxable Dividends and the Application of the Stop Loss Rules to Estates and Trusts
This is in reply to your letter of September 25, 2003, in which you ask for clarification of the rules in subsection 112(3.2) as they relate to a loss realized by an estate on the disposition of capital property. In particular, you ask whether the comments in paragraph 3 of Interpretation Bulletin IT-328R3, Losses on Shares on Which Dividends Have Been Received, are intended to suggest that a capital loss realized by an estate on the disposition of shares may be reduced by the amount of taxable dividends received by that estate on those shares.
All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").
For the purpose of your enquiry, we assume that the shares are capital property, and that the taxable dividends are not received in circumstances described in paragraph 1 for corporate-owned shares or in paragraph 6 of IT-328R3 for shares held by other taxpayers, referred to in this letter as "excluded dividends". Additionally, we assume that the shares are not "grandfathered" from the stop loss rules in subsection 112(3.2) because of paragraph 131(11)(b) of S.C. 1998, c.9.
As stated in paragraph 3 of the bulletin, the amount of taxable dividends received by an estate or trust on the shares of a corporation may be used in the calculation of the amount of any loss reduction required in respect of the disposition of those shares. The amount of taxable dividends received by an estate can affect the estate's loss reduction calculation in two ways.
First, the amount of taxable dividends received on the shares may reduce the amount of any reduction required in respect of capital dividends received by the estate in respect of the same shares. Second, the amount of any taxable dividends which have been designated under subsection 104(19) to a beneficiary who is either a trust, partnership or corporation will reduce the amount of the loss realized by the estate on those shares.
Subject to subsections 112(5.5) and (5.6), when a trust (other than a mutual fund trust) incurs a capital loss on the disposition of a share, subsection 112(3.2) requires the amount of the loss otherwise determined to be reduced by the total of two amounts.
The first amount is the lesser of:
? the total amount of all capital dividends (other than an excluded dividend) received on the share, and
? the amount by which the loss otherwise determined exceeds the amount of any taxable dividends received by the trust on the share, the amount of any taxable dividends designated under subsection 104(19) as being received by a beneficiary who is an individual other than a trust and the amount of any taxable dividends that are excluded dividends which are designated under subsection 104(19) as being received by any beneficiary that is a corporation, partnership or another trust.
Where the share was received by an individual's estate as a consequence of the individual's death or where a trust was deemed to have re-acquired the shares under subsection 104(4), this amount is then reduced by the lesser of 1/2 of the loss otherwise determined and 1/2 of the capital gain realized by the deceased individual immediately before death or, in the case of a trust, as a result of the deemed disposition under subsection 104C(4). The adjustment for a capital gain realized by the deceased taxpayer immediately before death is provided by subparagraph 112(3.2)(a)(iii) and the adjustment for a capital gain realized by a trust under subsection 104(4) is provided by subsection 112(3.3). In addition, where the loss is realized by the trust on the disposition of a share that was previously acquired as a result of a deemed disposition under subsection 104(4) (either by reason of the 21-year rule or the death of the spousal beneficiary of a spousal trust), only the dividends received after the deemed acquisition are used in the calculation of any loss reduction.
The second amount is the total of all taxable or life insurance capital dividends (other than excluded dividends referred to above) received by the estate or trust on the share which the estate or trust has designated under either subsection 104(19) or (20) as having been received by a beneficiary that is a corporation, partnership or trust.
The effect of a taxable dividend received by an estate on the loss calculation in respect of a share held as capital property can be illustrated by the following example:
Assume that an estate has realized a $1 million loss on the shares of a corporation. The estate has not held the shares for a full year so none of the dividends are excluded dividends. The estate has received a capital dividend of $500,000 in respect of the shares and taxable dividends of $700,000 of which $300,000 was designated as having been received by a beneficiary who is an individual (other than a trust) and $100,000 was designated as having been received by a corporate beneficiary (or a beneficiary who was a trust or a partnership). The remaining $300,000 taxable dividends were taxed in the estate. In addition, the capital gain realized by the deceased person from whom the estate acquired the shares was $1,200,000.
The loss reduction would be calculated as follows:
Loss otherwise determined
$1,000,000
The amount determined under paragraph 112(3.2)(a):
The lessor of:
(i) the capital dividend
$500,000
(ii) the loss
Less: the taxable dividends retained in the trust or designated to beneficiary who is an individual other than a trust
$1,000,000
(600,000)
$400,000
(iii)Less: one half of the lesser of the estate's loss (1,000,000) and the capital gain realized by the deceased (1,200,000)
$400,000
(500,000)
(0)
The amount determined under paragraph 112(3.2)(b):
Taxable dividends designated to the corporate beneficiary
(100,000)
Revised loss
$900,000
In summary, where the taxable dividends received by a trust or estate on shares have not been designated as having been received by a beneficiary who is a corporation, trust or partnership, the taxable dividends will not reduce the amount of any loss realized by the trust on the shares, but will still be relevant in determining the amount of any loss reduction required under subsection 112(3.2).
This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.
We trust our comments will be of assistance.
T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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