28 August 1992 Internal T.I. 9222657 F - Capital Loss Claim - S Corporations

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.

August 28, 1992

Attention:

John H. RoseDivision ChiefScarborough DOEnquiries and Office Examination19(1) Business and General

This is in reply to your memorandum dated July 21, 1992, concerning the above named taxpayer and his claim for capital losses incurred with respect to an "S" Corporation. 

The facts presented in your memorandum follow:

24(1)  

It is your position that the client is not entitled to a capital loss on his investment in   24(1)   until such time as the shares are sold in an arm's length transaction or until the corporation ceases to operate.

Specifically you requested our opinion on the nature of an "S" Corporation for Canadian tax purposes, and the propriety of claiming these corporate losses against other income in Canada.

Our Comments

The Foreign Section of this directorate has previously encountered these "S" corporations and accordingly we have attached a copy of a memorandum originating from this section outlining the problems encountered when dealing with a taxpayer who has an ownership interest in this type of corporation.  This memorandum explains that where an election is made by the shareholders of a U.S. corporation to be treated as an "S" corporation, "the corporation is not liable for tax and the items of income attributable to the "S" corporation are taxed at the shareholder level in a manner similar to the way in which like items of income attributable to a partnership are taxed in the hands of a partner (for U.S. tax purposes only)."  For Canadian tax purposes, the corporation is not considered a flow-through vehicle and hence the only income that would be taxed in Canada would be "S" corporation dividends received by the Canadian resident.  Neither "S" corporation foreign source income nor losses would be recognized in Canada as they are in the U.S.  Hence, we are in agreement with your opinion, that in order for the taxpayer to claim a capital loss on these "S" corporation shares, the shares must either be sold in an arm's length transaction or otherwise meet the conditions of subsection 50(1) of the Act.

G. Thornleyfor DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch