19 November 1990 Administrative Letter 900876 F - Denial of Loss on Share of Foreign Corporation

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.

19(1)

November 19, 1990

Dear Sirs:

Re:  Denial of loss on share of foreign corporation Subsections 4(4) and 112(4)

This is in response to your letter dated May 15, 1990, in which you requested a technical interpretation in respect of the application of subsection 112(4) to dividends received from a corporation not resident in Canada on a share that is not held as capital property. In particular, you requested our views concerning whether subsection 112(4) can apply to reduce a loss on such a share by the amount of a dividend on the share, even though the dividend is not deductible under section 112 or 113 in computing the taxable income of the shareholder.

All statutory references in, this letter are to the Income Tax Act (Canada) (the "Act").

The proposed amendments to subsection 112(4), as set forth in the draft legislation released by the Minister of Finance on July 13, 1990 (the "Draft Legislation"), may alleviate the concerns raised in your letter. However, since the Draft Legislation has not yet been enacted, we will summarize in this letter our interpretation of subsections 4(4) and 112(4) as presently worded. Accordingly, except where otherwise stated, the comments in this letter are based on the current, rather than the proposed, wording of these subsections.

Subsection 112(4) does not distinguish between a corporation resident in Canada and a corporation not resident in Canada, nor does it distinguish between a dividend that is deductible (be it under section 112 or 113) and a dividend that is not deductible. Hence, based on the express wording of the subsection, we are of the view that the loss-reduction rule contained therein applies (assuming that the exception provided by paragraphs 112(4)(a) and (b) is not available) even where:

(a)      the shares in question are shares of a corporation not resident in Canada; and

(b)     the dividend received on such shares is not deductible.

It is our view that subsection 4(4) does not provide relief in the manner suggested by your letter. The reasons for which we are of the opinion that subsection 4(4) does not preclude the application of subsection 112(4) are as follows:

1.     Subsection 4(4) does not apply where a contrary intention is evident. Subsection 112(3) specifically states that the loss-reduction rule contained therein applies only to the extent that the particular dividend is deductible from the recipient's income. Since subsection 112(4) does not contain such a limitation, it appears that the intention of Parliament was that the subsection should apply even where a dividend included in income does not qualify for a deduction under subsection 112(1).

2.     The portion of subsection 4(4) which is relevant to this analysis is:

     ... no provision of this Part shall be read or construed to require the inclusion ... in computing the income of a taxpayer for a taxation year or his income or loss for a taxation year from a particular source ... of any amount to the extent that amount has been included ... in computing such income or loss under, in accordance with or by virtue of any other provision of this Part.

     Thus, for subsection 4(4) to apply, there must be two statutory provisions each of which includes the same amount in computing income or in computing a loss. Strictly read, subsection 4(4) does not apply where one statutory provision includes an amount in computing income and another provision includes the same amount in computing a loss. Paragraph 12(1)(k) (read in conjunction with section 90) requires a taxpayer (who is assumed for purposes of this letter to be a trader or dealer in securities) to include in his income the dividends which he receives on shares of corporations not resident in Canada. However, subsection 112(4) does not also require such dividends to be included in his income; rather, it requires certain of those dividends to be subtracted from the amount that would otherwise be his loss from trading in  securities. Accordingly, paragraph 12(1)(k) and subsection 112(4) may both apply, without offending subsection 4(4).

3.     Subsection 4(4) applies only where there are two provisions of Part I of the Act which each require the inclusion or permit the deduction of the same amount in computing a taxpayer's income or loss. While paragraph 12(1)(k) (read in conjunction with section 90) requires the inclusion of dividends on foreign shares in computing a taxpayer's income, subsection 112(4) contains a rule that is, applied in computing a taxpayer's taxable income. Since the Act expressly distinguishes between income and taxable income, it follows that subsection 4(4) does not preclude the application of subsection 112(4).

We appreciate that the above analysis may lead to a harsh result, as illustrated by your example. However, we do not believe that the wording of subsection 4(4) goes so far as to provide the appropriate relief. Rather, we are of the view that such relief must be effected by an amendment to the Act.

While the Draft Legislation proposes certain amendments to subsection 4(4), the amendments do not appear to address the arguments summarized in paragraphs 1 and 3 above. Perhaps it is arguable that the proposed insertion in two locations in subsection 4(4) of the words "directly or indirectly" will rebut the argument in paragraph 2 above, although we have some doubt in this regard.

While the proposed amendments to subsection 4(4) may not provide relief in the circumstances described in your letter, it appears that the appropriate relief will be provided, with some retroactive effect, by the proposed amendments to subsection 112(4), as set forth in subsection 82(2) of the Draft Legislation.

The foregoing expressions of opinion are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on the Department.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and IntergovernmentalAffairs Branch