24 March 1995 External T.I. 9431545 - EXECUTOR'S YEAR, LOSS ON SALE OF SHARES

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.

Principal Issues:

Does 85(4) apply to deny the loss to an estate in the situation where some of the voting shares of a corporation held by the estate are distributed to its beneficiaries (one of whom is the legal representative of the estate) and then the balance of the shares are acquired by the corporation. The legal representative will not own enough shares in his or her personal capacity to control the corporation.

Position TAKEN:

The response to part 2) of question 42 of the Revenue Canada Round Table in the 1991 Conference Report of the CTF still represents our position until such time as the review of that position has been completed. 85(4) will not apply where after the disposition of all the shares held by the estate, a legal representative of the estate in his or her personal capacity controls the corporation as long as the estate does not have de facto control of the corporation. However, GAAR may have application where the method and timing of redeeming the shares is undertaken primarily to circumvent the application of 85(4).

Reasons FOR POSITION TAKEN:

Consistent with the previous responses issued (see files #3-942858, 3-930574, 932870, 3-922143, 5-901453, 911807, 910830, 911359, 911807, 3-1316). Review of question 42 response is not completed.

943154
XXXXXXXXXX C.R. Bowen

Attention: XXXXXXXXXX

March 24, 1995

Dear Sirs:

We are writing in reply to your letter of December 5, 1994 concerning the income tax consequences to an estate where some of the shares of a corporation held by the estate are distributed to the estate's beneficiaries and then the balance of the shares are disposed of to the corporation. We apologize for the delay in responding to your letter.

In your letter you outlined proposed transactions that are being considered by the executors of the estate of Mr. X. Your request related to an actual fact situation and accordingly, should be the subject of an advance income tax ruling request. While we can not provide comments on the situation outlined in your letter, we will offer the following general comments which may be of assistance to you.

The will of a deceased taxpayer and/or the relevant laws of the province will determine whether the executor of the estate of a deceased taxpayer has the right to sell all or part of the property of the estate and then distribute the cash to the beneficiaries or to simply distribute the property to the heirs in accordance with the terms of the will. In this regard, an article entitled "Legal and Taxation Issues Affecting Estates with Certain Business Assets" by Norm Promislow which starts on page 41:1 of the 1987 Conference Report of the Canadian Tax Foundation has several comments on the duties and obligations of an executor that may be relevant (in particular, on pages 41:3, 41:51, 41:63 and 41:67).

Prior to winding up an estate that owns all the shares of a corporation ("ACo"), the executor of the estate may decide to:

1) distribute some of the shares to the beneficiaries of the estate (one of whom is the executor who will not receive enough shares to have de jure control of ACo), and

2) subsequently, cause ACo to acquire the remaining shares held by the estate.

Assuming that ACo is resident in Canada, the amount distributed to the estate on the acquisition of those shares will be subject to subsection 84(3) of the Income Tax Act (the "Act"). Under that provision, a deemed dividend will be received by the estate to the extent that the amount paid by ACo exceeds the paid-up capital of those shares.

Assuming that the deemed dividend is a taxable dividend, the amount of the dividend will reduce the proceeds of disposition of the shares (in accordance with paragraph (j) of the definition of "proceeds of disposition" in section 54 of the Act). A capital loss from the disposition of the shares will be realized by the estate to the extent that the adjusted cost base of the shares to the estate exceeds the reduced proceeds of disposition. Alternatively stated, the disposition of the shares will give rise to a capital loss to the estate where the deemed acquisition cost (determined in accordance with paragraph 70(5)(b) of the Act) of such shares to the estate exceeds the paid-up capital of those shares.

Whether such as a capital loss will be deemed to be nil by virtue of paragraph 85(4)(a) of the Act will depend on whether the conditions described in the preamble of subsection 85(4) of the Act are met. Although the Department's response to part 2) of question 42 of the Revenue Canada Round Table in the 1991 Conference Report of the Canadian Tax Foundation is currently under review, until such time as a revised position is communicated to the public, it will continue to represent our position. It is our current position that subsection 85(4) of the Act will not generally apply where all the shares of a corporation held by an estate are disposed of to the corporation which, immediately following the disposition, is controlled by the legal representative of the estate in his or her personal capacity unless, immediately after the disposition, the corporation is controlled, directly or indirectly in any manner whatever (as defined in subsection 256(5.1) of the Act) by the estate (i.e., the legal representative of the estate in the capacity as executor of the estate). The shares held by such a legal representative in his or her personal capacity may have been owned prior to becoming the legal representative of the estate or as a result of the estate distributing part of its shares to the beneficiaries (one of whom is the legal representative) prior to the disposition of the remaining shares held by the estate to the corporation.

For the purposes of subsection 85(4) of the Act, control of a particular corporation may be direct or indirect, de jure or de facto, and as such, it would be essential to review all the facts related to a particular situation to determine whether such control exists. Therefore, even though an estate may not own any voting shares of a particular corporation, it could still be in a position to exercise some influence over that corporation which would result in it having factual control over the corporation. For example, if the shares owned by an estate are repurchased for consideration consisting of a demand promissory note and the calling of the note by the estate would have an adverse impact on the operations of the corporation, then the estate could be considered to have some influence which could result in factual control over the corporation. In applying subsection 85(4) of the Act, we do not generally consider that an estate is controlled by a person or group of persons since the Act contemplates the concept of control as it relates to a corporation and not of an individual.

Where the capital loss resulting from the disposition of shares held by an estate has not been denied under subsection 85(4) of the Act and the disposition of those shares has taken place within the first taxation year of the estate, subsection 164(6) of the Act will be available to apply any net capital losses arising in the executor's year of a deceased taxpayer against taxable capital gains reported in the year of death return of that person. However, in the above example of ACo, if the distribution of the shares to the beneficiaries of the estate prior to the disposition of the shares owned by the estate may reasonably be considered to have been undertaken or arranged primarily to circumvent the application of subsection 85(4) of the Act, the provisions of subsection 245(2) of the Act may be applicable to the series of transactions.

These comments represent our opinion of the law as it applies generally. As indicated in paragraph 21 of the Information Circular 70-6R2 dated September 28, 1990, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada.

We trust that our comments will be of assistance to you.

Yours truly,

for Director
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch