12 November 2009 Internal T.I. 2009-0315431I7 - Interaction of subsections 100(4) and 40(3.4)

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 a capital loss otherwise reduced under subsection 100(4) of the Act is to be calculated as if the disposition took place at the time specified in paragraph 40(3.4)(b) of the, if the conditions in subsection 40(3.3) are met. In other words, should the application of subsection 100(4) be deferred until the time specified in paragraph 40(3.4)(b) of the Act.

Position: The capital loss should be calculated by applying all of the relevant provisions of the Act, with the exception of paragraph 40(2)(g). It is this loss that is then deferred under paragraph 40(3.4)(b).

Reasons: Paragraph 40(3.4)(b) refers to the loss from the particular disposition "determined without reference to paragraph (2)(g) [i.e., 40(2)(g)] and this subsection [i.e., 40(3.4)]".

								November 12, 2009

	V & E Division					HEADQUARTERS
	Toronto East TSO					Income Tax Rulings Directorate
J. Gibbons, CGA
	Attention:  Iftekhar Shariff			(819) 458-3538

								2009-031543

Interaction of Subsection 100(4) and Subsection 40(3.4)

This is in response to your email dated March 27, 2009, regarding the above-noted issue. In particular, you have asked for our views on whether the stop-loss rule in subsection 100(4) of the Income Tax Act (the "Act") would apply in calculating a loss on the disposition of a partnership interest in a situation where the loss deferral rules in subsection 40(3.4) of the Act also apply to the particular disposition. You have also asked whether there are stop loss rules similar to subsection 100(4) of the Act that would apply in the case where a corporation incurs a loss on the disposition of a partnership interest and that partnership held shares in respect of which it received dividends that were deducted by the corporation under section 113 of the Act. If there are similar rules, you have also asked how these would interact with subsection 40(3.4) of the Act.

The above issue has arisen with respect to an audit of a Canadian corporation ("Canco") that incurred a loss on the disposition of its interest in a limited partnership (the "Limited Partnership"). Canco owned XXXXXXXXXX % of the units of the Limited Partnership while the remaining XXXXXXXXXX %, of the units were held by the "General Partner", a company related to Canco. Previously, Canco claimed a deduction under section 112 of the Act for dividends allocated from the Limited Partnership, which were received by Limited Partnership from a wholly-owned corporation. Afterwards, Canco sold its Limited Partnership units to an affiliated company at a loss of $XXXXXXXXXX and reported the loss as a suspended loss under subsection 40(3.4) of the Act. Canco has taken the position that since subsection 40(3.4) applies to the disposition of the Limited Partnership, subsection 100(4) would not be applied until the deemed disposition date set out in paragraph 40(3.4)(b) of the Act.

Our views

In general terms, subsection 100(4) ensures that a taxpayer's capital loss on the disposition of a partnership interest is reduced where the partnership owns shares of a corporation and the partner's share of a partnership loss would have been reduced by virtue of subsection 112(3.1) of the Act if the partnership had disposed of its shares at fair market value immediately before the corporate partner disposed of its partnership interest.

Similarly, subsection 93(2.2) is an anti-avoidance provision which prevents the use of partnerships to avoid the stop-loss rules in subsection 93(2) of the Act. The latter provision applies to capital losses incurred by a corporation on the disposition of shares in respect of which the corporation received dividends that were deductible under section 113 of the Act.

Subsection 40(3.4) of the Act defers the recognition of a capital loss on a disposition of particular non-depreciable capital property where the disposition is to an "affiliated person" as defined in section 251.1 of the Act. The deferral applies until the earliest of several possible subsequent events, the most typical of which is the time that the property has been transferred to a person who is not affiliated with the initial transferor. Once this occurs, the initial transferor can then recognize the deferred loss.

In our view, the stop loss rules in subsection 100(4) or 93(2.2) of the Act would apply at the time of the actual disposition of the property to determine the amount of the taxpayer's capital loss. If the conditions in subsection 40(3.3) of the Act also apply to the particular disposition, the recognition of the loss, if any, as first determined under subsection 100(4) or 93(2.2) would be deferred according to the rules in subsection 40(3.4) of the Act.

We would also note that the above position is also consistent with the Technical Notes issued by the Department of Finance at the time of the introduction of subsections 40(3.3) and (3.4) of the Act, which refer to the then new provisions as providing only for a deferral of the particular losses. On the other hand, Canco's suggestion could result in a different loss being calculated, and, in fact, could result in the circumvention of subsection 100(4) or 93(2.2) entirely, depending on the circumstances.

For your information a copy of this memorandum will be severed using the criteria in the Access to Information Act and placed in the CRA'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 the Taxpayer 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. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Yours truly,

G. Moore
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch