21 March 2007 External T.I. 2004-0091061E5 - stop loss rules for depreciable property

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.

Principal Issues: Does 13(21.2) apply to reduce the proceeds of disposition of depreciable property when such property is transferred from a trust to a majority interest beneficiary (a person affiliated with the trust) and the trust winds up within 30 days of the transfer such that the beneficiary is not affiliated with the trust 30 days after the transfer?

Position: Unlike 14(12), 18(15) & 40(3.3), 13(21.2) does not prevent the deduction of a loss when a trust transfers property to an affiliated person and that affiliated person ceases to be affiliated with the trust within 30 days of the transfer.

Reasons: Despite possible tax policy concerns, the wording of subsection 13(21.2) does not appear to apply if the transferee is no longer affiliated with the trust at the end of the 30 day period referred to in that subsection.

XXXXXXXXXX 								2004-009106
									Annemarie Humenuk
Attention:  XXXXXXXXXX 

March 21, 2007

Dear XXXXXXXXXX:

Re: Application of the Stop Loss Rules to a Disposition of Property by a Trust

This is in reply to your letter of August 16, 2004, in which you ask for clarification of the stop loss rules in subsection 13(21.2) as they pertain to the transfer of depreciable property from a personal trust to a person affiliated with the trust and the trust winds up within 30 days of the date of the distribution to that person. We apologize for the delay in our response.

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").

Subsection 13(21.2) of the Act will generally apply when depreciable property of a prescribed class has been disposed of by a person (the "transferor") to a transferee who is affiliated with the transferor and the transferee continues to own the property 30 days after the transfer of the property and the proceeds of disposition for the property are less than the lesser of:

A) the capital cost of the property, and

B) the proportion of the undepreciated capital cost of the property of that class that the fair market value of the transferred property is of the fair market value of all property of that class.

It is your view that subsection 13(21.2) will not apply if the trust winds up within 30 days of the transfer on the basis that the trust will cease to exist with the result that no person will be affiliated with the trust on the day that is 30 days after the transfer.

Provided that the affiliated person who receives the property from the trust is no longer affiliated with the trust at the end of the 30 day period, we agree that subsection 13(21.2) will not apply to suspend any terminal loss that arises on the transfer of depreciable property from a trust to a person who is affiliated with the trust at the time of the transfer and that person continues to own the property 30 days after the transfer of the property.

The same result would not apply in respect of the application of subsections 14(12), 18(15) and 40(3.3) to a transfer of capital property other than depreciable property and property held in an adventure in the nature of trade in similar circumstances. These provisions will generally deny or suspend the loss if a person affiliated with the trust acquires the applicable type of property at any time within 30 days before or after the trust's disposition of the property.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.

We trust our comments have clarified our position with respect to this issue.

T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch