8 May 1996 External T.I. 9607535 - EFFECT OF BANKRUPTCY ON SHARES IN RRSP

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:

Whether bankruptcy results in shares being disposed of by RRSP trust shareholder and write-off of cost by RRSP trust.

Position:

No disposition.

Reasons:

Shares exist until corporation is dissolved or wound-up and shares are cancelled; however, where shareholder elects in return for RRSP trust's taxation year in which bankruptcy, winding-up order, or insolvency and termination of business occurs, 50(1)(b) results in a deemed disposition which causes the acb of the shares to be reduced to nil.

				960753
XXXXXXXXXX			P. Spice

Attention: XXXXXXXXXX

May 8, 1996

Re: Effect Of Bankruptcy on Shares
Held in a Registered Retirement Savings Plan

This is in reply to your letter of February 22, 1996, in which you ask whether shares of a bankrupt company are deemed to have been disposed of by a registered retirement savings plan ("RRSP"). You refer to two Tax Court of Canada cases, Jackson v. M.N.R. 84 DTC 1232 and Single v. M.N.R. 84 DTC 1611.

We have reviewed the comments by the Court in both cases and in our view neither case concludes that a shareholder has disposed of shares at the time the issuing corporation is bankrupt. Jackson refers to the meaning of "disposition" in (former) paragraph 54(c) of the Income Tax Act (the "Act") and concludes that until the shares are redeemed or cancelled the shares in a bankrupt company, although worthless, are not disposed of by reason of the bankruptcy.

Single refers to two provisions, namely paragraph 50(1)(b) of the Act and the aforementioned definition of "disposition". Paragraph 50(1)(b) provides for a deemed disposition and reacquisition by the shareholder for proceeds equal to nil when the issuing corporation has become bankrupt. This permits the shareholder to crystallize a capital loss and claim it in the year the corporation becomes bankrupt. (This will usually be irrelevant for a shareholder which is an RRSP trust.) Single also comes to the same conclusion as Jackson on the effect of the definition of "disposition" in former paragraph 54(c): that until the share is redeemed or cancelled, there is no disposition of shares in a corporation by reason of its bankruptcy.

In our view a share of a corporation that is not cancelled by a corporation will generally continue to exist until the corporation is legally wound up. Therefore, until that time, a share of a corporation cannot be removed from the records of an RRSP.

However, because of the application of paragraph 50(1)(b) the shares "adjusted cost base" or "cost amount" as those two terms are defined in subsection 248(1) of the Act may be reduced to nil if the RRSP trust so elects in its return of income filed pursuant to subsection 207(1) of the Act for the relevant year. If an election is made, the cost of the shares of a bankrupt company in an RRSP will not reflect the pre-bankruptcy values for purposes of the Part XI tax. Note the election must be made in the return for the taxation year of the RRSP trust in which the company became bankrupt (within the meaning of subsection 128(3) of the Act), a winding-up order under the Winding-Up Act was made or the conditions in subparagraph 50(1)(b)(iii) were met.

The application of the various provisions of Part XI.1 of the Act require a calculation of the fair market value of a property "at the time it was acquired" and there are no provisions in the Act which will allow this value to be redetermined as a consequence of any decrease in the value of a property subsequent to its acquisition. In general, the only means available to eliminate or reduce the value is by disposition of the property at its fair market value.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch