6 June 1995 External T.I. 9511705 - LOSS ON DISPOSITION 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.

		951170
XXXXXXXXXX		A. Seidel

Attention: XXXXXXXXXX

June 6, 1995

Dear Sirs:

This is in reply to your facsimile dated April 24, 1995 with respect to the application of subsection 85(4) of the Income Tax Act (the "Act").

The situation described in your letter appears to involve specific taxpayers and actual proposed transactions. Assurance as to the tax consequences of actual proposed transactions will only be given in the context of an advance income tax ruling. The procedures for requesting an advance income tax ruling are outlined in Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada, Customs, Excise and Taxation. However, we can offer the following general comments which we hope will be of assistance to you.

The Department's position with respect to the application of subsection 85(4) of the Act to this type of situation is currently under review. In the meantime, the Department will continue to follow the position set out in its response to question 42 of the 1991 Canadian Tax Foundation Revenue Canada Round Table that subsection 85(4) of the Act will not apply to such a situation unless the corporation which redeems its shares is, immediately following the disposition of the shares by the estate, controlled, directly or indirectly in any manner whatever, by the estate. In this regard, it must be noted that we are dealing with two concepts of control. The executor of the estate, in his or her personal capacity, may be part of a related group of persons, within the meaning of subsection 251(4) of the Act, which will have de jure control of the corporation after the disposition of the shares by the estate by virtue of the fact that the related group owns more than 50% of the voting shares of the corporation. However, subsection 85(4) of the Act refers to the corporation being "controlled, directly or indirectly in any manner whatever", which, pursuant to subsection 256(5.1) of the Act, includes the concept of de facto control. Although the estate may not own any of the shares of the corporation, it could still be in a position to exercise some influence over the corporation which would result in it having de facto control over the corporation. For example, if the shares owned by the estate are repurchased for consideration consisting of a demand promissory note or retractable preferred shares and the demand to pay the note or the retraction of such shares 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 de facto control of the corporation. The determination of whether the estate has any such influence over the corporation can only be made following a consideration of all of the facts related to a particular situation.

Since a corporation ceases to exist and all of its shares are acquired for cancellation when it is wound up, subsection 85(4) of the Act would not apply to the acquisition of the shares held by the estate when the corporation is wound up since the corporation could not be controlled, directly or indirectly in any manner whatever, immediately after the disposition by the estate.

It should be noted that on April 26, 1995, Secretary of State Doug Peters released draft legislation which proposes to replace subsection 85(4) of the Act with proposed subsections 40(3.3) and (3.4). In the case of capital property which is a share of a corporation which is disposed of to the corporation, proposed subsection 40(3.4) will apply to deny any loss which would otherwise arise on the disposition if the corporation is affiliated with the estate immediately after the disposition. The amount of the loss which is denied will be added to the adjusted cost base of any other shares owned by the estate in the acquiring company. The expression "affiliated persons" is defined in proposed subsection 251.1(1) which provides, inter alia, that a corporation and a person by whom the corporation is controlled are affiliated persons. Proposed subsection 251.1(2) provides that for the purposes of determining whether persons are affiliated with each other, the expression "controlled" means controlled directly or indirectly in any manner whatever.

As indicated in paragraph 21 of Information Circular 70-6R2 this is not an advance income tax ruling and is therefore not binding on Revenue Canada, Customs, Excise and Taxation.

Yours truly,

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