13 August 2008 External T.I. 2008-0274451E5 - Loss Denial Rules

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: Whether capital losses arising from disposition of shares deemed to have been made under s. 50(1) will be subject to deferral or denial under s. 40(3.4) or 40(3.6)?

Position: No.

Reasons: Dispositions under s. 50(1) specifically carved-out from application of s. 40(3.4). Subsection 50(1) does not deem disposition of shares of a corporation to have been made by the electing taxpayer to the corporation, so s. 40(3.6) is not applicable.

      								2008-027445
XXXXXXXXXX 								J. MacGillivray
(613) 957-2053
August 13, 2008

Dear Sir:

Re: Loss Denial Rules

We are writing in response to your letter to the Winnipeg Tax Centre dated March 14, 2008, in which you request a technical interpretation with respect to the application of subsections 40(3.3), (3.4) and (3.6) and subsection 50(1) of the Income Tax Act (Canada) (the "Act"). You have asked us to consider whether subsection 40(3.4) would apply to suspend the recognition of losses, or whether subsection 40(3.6) would deny the recognition of losses, that arise as a consequence of an election made by a corporation to have subsection 50(1) apply in respect of the shares of an insolvent, wholly-owned subsidiary.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency.

Paragraph 40(3.3)(a) provides that subsection 40(3.4) will not apply to a disposition of capital property (other than depreciable property of a prescribed class) that is described within paragraphs (c) to (g) of the definition of "superficial loss" in section 54 of the Act. Paragraph (c) of the superficial loss definition includes a disposition that is deemed to have been made pursuant to an election under subsection 50(1). Accordingly, subsection 40(3.4) will not apply to a disposition of shares that is deemed to have been made under subsection 50(1).

With respect to subsection 40(3.6), which applies to deny the recognition of capital losses that would otherwise be realized by a taxpayer from a disposition of the share of the capital stock of a corporation to the corporation where the taxpayer is affiliated with the corporation immediately after the disposition, it is our view that the deeming provisions of subsection 50(1) do not deem the taxpayer making the election to have disposed of the shares of the corporation to the corporation. Rather, the closing portion of subsection 50(1) deems the taxpayer to have disposed of the shares of the corporation at the end of the taxation year for proceeds equal to nil and to have reacquired the shares immediately after the end of the year at a cost equal to nil. Accordingly, subsection 40(3.6) does not apply to a disposition of shares that is deemed to have been made under subsection 50(1).

We trust the foregoing is satisfactory. Our comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular IC 70-6R5, dated May 17, 2002.

David Palamar
Manager
Corporate Reorganizations Section II
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch