This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation] (1) Does paragraph 110.6(7)(b) apply to deny the capital gains deduction claimed by a taxpayer?
(2) Can the Canada Revenue Agency reassess a taxpayer in respect of a prescribed year that would increase the tax payable for that year? Can the taxpayer claim the capital gains deduction for a gain realized in 2006?
Position: (1) Yes.
(2) No. The Minister may only reassess a prescribed year if the requirements of subsection 152(4.2) are met. The taxpayer could not claim an amount for a capital gains deduction in 2006, since the maximum amount was claimed in 2007.
Reasons: The Income Tax Act
October 24, 2012
|XXXXXXXXXX Tax Services Office
Business and Employment Income Division
Denial of Capital Gains Deduction -- Paragraph 110.6(7)(b)
We are writing to you in response to your email of July 23, 2012, regarding the above subject.
Please note that, unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the “Act").
In particular, you described a situation where, as part of a reorganization, an individual ("Mr. A") effected an estate freeze by converting Class "AA" shares of the capital stock of a corporation ("Opco ") to Class "F" Opco shares. Subsection 51(2) has been applied to determine both the proceeds of disposition of the Class "AA" Shares and the adjusted cost base of the Class "F" Shares. Since subsection 51(2) was applied in this case, we have assumed that Mr. A's estate freeze was made utilizing the provisions of subsection 51(1).
The application of subsection 51(2) to the transaction described above resulted in an additional capital gain on the sale of Class "F" shares by Mr. A. He wishes to claim the capital gains deduction pursuant to section 110.6.
A second individual ("Mr. B") claimed the maximum amount for the capital gains deduction in 2007. However, pursuant to a conversion effected in accordance with subsection 51(1), that taxpayer sold the shares so received in 2006. The taxpayer wishes the Canada Revenue Agency ("CRA") to reassess 2007 for the purpose of reversing the capital gains deduction claimed in that year and would like to claim the deduction in 2006 instead. The 2007 year is currently statute-barred.
In light of the situation described above, you asked the following two questions:
(1) Would it be possible to deny the capital gains deduction claimed by Mr. A on the basis of paragraph 110.6(7)(b)?
(2) With respect to Mr. B, is CRA required to accept the request for reassessment of the 2007 year? Can CRA allow Mr. B to claim the capital gains deduction in 2006?
(1) Where paragraph 110.6(7)(b) applies in a particular situation, an individual may not claim the capital gains deduction under section 110.6.
For this provision to apply, the CRA must establish that the disposition of Class "F" shares of the capital stock of Opco -- assuming that Mr. A has actually disposed of them -- was part of the series of transactions or events in which Opco acquired the Class "AA" shares of its capital stock for consideration less than their fair market value.
In addition, paragraph 110.6(7)(b) will only apply if it is determined that Opco acquired Class "AA" shares of its capital stock for consideration that is "significantly less" than the FMV of those shares at the time of acquisition.
Series of transactions or events
The determination of the constituent transactions of a series requires the consideration of all relevant facts and circumstances in light of the common law, subsection 248(10) and the jurisprudence, including the Supreme Court of Canada decision in Copthorne Holdings (footnote 1) ("Copthorne").
English common law defines a series of transactions or events such that "each transaction in the series must be pre-ordained to produce a final result" (footnote 2).
In addition, subsection 248(10) reads as follows:
For the purposes of this Act, where there is a reference to a series of transactions or events, the series shall be deemed to include any related transactions or events completed in contemplation of the series.
According to the Supreme Court of Canada in Copthorne, in determining whether a transaction is part of a series of transactions or events, it is necessary to determine whether the related transaction is carried out because of the series of transactions or events. Although the “because of” or “in relation to” test of related transactions does not require a strong nexus, it does require more than a mere possibility or a connection with an extreme degree of remoteness.
In Canada Trustco (footnote 3), the Supreme Court of Canada found that subsection 248(10) was both prospective and retrospective, i.e., a related transaction could precede or follow a series of transactions or events:
Section 248(10) extends the meaning of “series of transactions” to include “related transactions or events completed in contemplation of the series”. The Federal Court of Appeal held, at para. 36 of OSFC, that this occurs where the parties to the transaction “knew of the . . . series, such that it could be said that they took it into account when deciding to complete the transaction”. We would elaborate that “in contemplation” is read not in the sense of actual knowledge but in the broader sense of “because of” or “in relation to” the series. The phrase can be applied to events either before or after the basic avoidance transaction found under s. 245(3).
Thus, the wording of s. 248 (10) permits the prospective or retrospective attachment of a related transaction to a series within the meaning of the common law. Such an interpretation seems to be consistent with the legislator's objective.
Whether the disposition of the Class "F" shares is part of a series of transactions or events in which Opco acquired the Class "AA" shares of its capital stock is a question of fact. However, we hope that the above comments will be helpful to you in the course of your analysis.
(2) With respect to your second question, by virtue of subsection 152(4.2), the Minister of National Revenue ("Minister") may, in certain situations and at the request of a taxpayer, reassess after the end of the normal reassessment period applicable to the taxpayer for a particular taxation year that is within the previous 10 calendar years. This power of the Minister is discretionary and the applicable standard of review is reasonableness. We invite you to read Information Circular IC07-1, Taxpayer Relief Provisions, for more information.
In Lanno v. CCRA (footnote 4), the Federal Court of Appeal dealt with subsection 152(4.2) and stated that a decision made under subsection 152(4.2) must meet the standard of reasonableness. The Supreme Court of Canada explained what that standard was in the decision in Dunsmuir v. New Brunswick (footnote 5):
… Reasonableness is primarily about the rationale for the decision, the transparency and intelligibility of the decision-making process, and the fact that the decision belongs to the possible acceptable outcomes that can be justified on the facts and the law. …
Furthermore, nothing in the Act permits the Minister to make an assessment for a taxation year after the expiration of the normal reassessment period applicable to a taxpayer for that year, if the result of the assessment is to increase the tax payable by the taxpayer for the year.
Thus, it would not be possible for the Minister to issue an assessment for the 2007 taxation year in order to cancel the capital gains deduction previously claimed by Mr. B. In addition, since he claimed the maximum amount under of the capital gains deduction in 2007, he would not be able to claim an amount for this deduction for the year 2006, even if the later year were reopened under subsection 152(4).
We hope that our comments are of assistance.
François Bordeleau, Advocate
Business and Employment Income Division, Section I
Income Tax Rulings Directorate
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 2012 DTC 5006 (SCC)
2 OSFC Holdings Ltd. v. Canada, 2001 FCA 260,  2 F.C. 288, par. 24
3 Canada Trustco Mortgage Co. v. Canada,  2 S.C.R. 601
4  5 FCA 76
5 2008 SCC 9
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