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: Under subsection 112(3.2), how will the stop loss reduction be determined where the redemption of shares held by a trust is structured in two steps on consecutive days?
Position: The transactions will be viewed as two separate transactions
Reasons: Similar to previous positions, the stop loss reduction pursuant to subsection 112(3.2) should be computed on a share by share basis.
June 9, 2009
MONTREAL TSO HEADQUARTERS
Estates and Trusts, Income Tax Rulings
Section 442-2-6, 8th floor Directorate
Kimberly Duval, CA
Attention: Qiu Cheng (613) 957-8585
Stop Loss Reduction - Subsection 112(3.2) of the Act
This is in response to your e-mail correspondence of February 17, 2009, requesting our comments in relation to a pending reassessment involving the calculation of a capital loss on shares held by a trust. Specifically, you have asked us to consider the application of subsection 112(3.2) in the reduction of a capital loss in the following circumstances:
1. Mr. S died on XXXXXXXXXX .
2. At the time of his death, he was the sole shareholder of a private corporation - he held XXXXXXXXXX common shares.
3. On death, a capital gain of $XXXXXXXXXX was realized on the deemed disposition of the shares pursuant to subsection 70(5) of the Act.
4. During the first year of the estate, the corporation redeemed a total of XXXXXXXXXX of the XXXXXXXXXX common shares held by the estate. The aggregate capital loss for the year of $XXXXXXXXXX was realized and was carried back to Mr. S's final return by virtue of subsection 164(6).
5. The redemption of the XXXXXXXXXX common shares was done in two steps -
a. On XXXXXXXXXX , the corporation redeemed XXXXXXXXXX common shares resulting in a deemed dividend of $XXXXXXXXXX in which the corporation made an election under subsection 83(2) of the Act to have this deemed dividend paid from the corporation's capital dividend account. This redemption resulted in a capital loss of $XXXXXXXXXX to the estate; and
b. On XXXXXXXXXX , the corporation redeemed XXXXXXXXXX common shares resulting in a deemed taxable dividend of $XXXXXXXXXX and a capital loss of $XXXXXXXXXX to the estate.
The representative for the estate has confirmed that it arranged for two redemptions of common shares to enable the corporation to make a subsection 83(2) election to the extent of its capital dividend account. However, it is submitted that a more favourable outcome would have resulted had all of the shares been redeemed in a single transaction and as such; the representative is seeking administrative relief in this regard.
In your view, each of the two redemptions described above in 5a and 5b should be treated as a separate transaction for purposes of calculating the impact of stop-loss rules in subsection 112(3.2) of the Act. You have proposed to reduce the capital loss of $XXXXXXXXXX , as described in 5a above, by $XXXXXXXXXX as the amount determined under paragraph 112(3.2)(a).
We agree with your views and the proposed reassessment of the stop loss reduction under subsection 112(3.2) of the Act in respect of the payment of the capital and taxable dividends to the trust on XXXXXXXXXX and XXXXXXXXXX respectively.
The Canada Revenue Agency had previously expressed its views on a similar transaction at the 1996 Ontario Tax Conference. Our views were such that the reduction of the capital loss as determined under subsection 112(3.2) of the Act was appropriately calculated in relation to each transaction in which a capital loss arose.
We trust that these comments will be of assistance.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. You should make requests for this latter version to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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