23 June 1995 External T.I. 9431525 - CAPITAL LOSS REALIZED BY ESTATE

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

		5-943152
XXXXXXXXXX	Marc Ton-That

Attention: XXXXXXXXXX

June 23, 1995

Dear Sirs:

Re: Application of subsection 85(4)

This is in reply to your letter of July 7, 1994 wherein you required clarification on an answer given by the Department at the Round Table of the 1991 Canadian Tax Foundation Conference on the application of subsection 85(4) of the Income Tax Act (the "Act") to a capital loss realized by an estate. We apologize for the delay.

Question #42 of the above-mentioned Round Table referred to a situation where all the shares held by the estate are disposed of to the corporation but the legal representative, in a personal capacity, continues to control the corporation by virtue of a beneficial ownership of controlling shares.

The Department's answer was that subsection 85(4) will not generally apply unless the corporation is, immediately after the disposition of its shares by the estate, controlled, directly or indirectly in any manner whatever, by the estate. The Department was of the view that control of the corporation by the legal representative, in a personal capacity, does not, by itself, constitute control of the corporation by the estate for the purposes of subsection 85(4).

Although the above-described position is still in application, we would like to mention that it is currently under review. Furthermore, we would like to mention that the draft amendments to the Act issued by the Department of Finance on April 26, 1995 propose to repeal subsection 85(4) and introduce new subsection 40(3.4) which would be applicable to the above-described situation. The above-described position, which is under review, would also apply for the purposes of determining whether an estate and a corporation are "affiliated persons" for the application of subsection 40(3.4).

As for your question regarding loss deductibility under subsection 111(2), we agree with you that capital losses deemed to be capital losses of the deceased by virtue of subsection 164(6) for the taxation year in which he(she) died will qualify for subsection 111(2) application.

We trust the above comments will be of assistance.

As stated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, the opinions expressed in this letter are not rulings and are consequently not binding on the Department.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch