25 September 1997 External T.I. 9703175 - TRANSFER OF CORPORATE DEBT AND DENIED LOSS

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:

Denied loss on application of 53(1)(f.1) and 18(3)

Position:

1) 53(1))f.1) denied loss added to acb of transferre
2) 18(3) denied loss is preserved and deducted by transferor on eventual liquidation or sale of the property

Reasons:

1)2) June 1996 ways and means

	                                	970317
XXXXXXXXXX                             	C. Tremblay 

Attention: XXXXXXXXXX

September 25, 1997

Dear Sir:

Re: Paragraph 53(1)(f.1) and subsection 18(13) of the Income Tax Act (the "Act")

This is in reply to your letter dated January 27, 1997 wherein you requested our comments with regards to the application of paragraph 53(1)(f.1) of the Act and subsection 18(13) of the Act in the specific situation presented.

It appears that your request for an opinion involves both specific taxpayers and completed transactions. Since the responsibility for determining the tax consequences arising from completed transactions rests with the taxation services offices, the appropriate taxation services office may, upon disclosure of all the relevant facts, be able to assist you in clarifying the tax consequences pertaining thereto.

Although we cannot comment directly on your situation, we are able to provide you with the following general comments on the application of paragraph 53(1)(f.1) and subsection 18(13) of the Act.

Paragraph 53(1)(f.1) of the Act provides for an increase in computing the adjusted cost base to a taxable Canadian corporation of property transferred to the corporation, equal to the capital loss denied to the transferor because of paragraph 40(2)(e) or (e.1) or subsection 85(4) of the Act.

Where a corporation (the "transferor corporation") has sold a corporate debt owing from another corporation to a corporation (the "transferee corporation") at a loss, the loss is added to the adjusted cost base ("ACB") of the transferred property pursuant to paragraph 53(1)(f.1) of the Act. Subsequently if the transferor corporation goes bankrupt, there would generally be no further income tax implications to the transferee corporation until the debt is disposed of, or until the corporation owing the funds goes bankrupt. The Department, however, would consider the application of the General Anti Avoidance Rules ("GAAR") in situations where the transferee corporation is attempting to increase its losses and the arrangement is arranged primarily to obtain a tax benefit.

Subsection 18(13) of the Act denies the recognition of superficial losses sustained by a taxpayer whose ordinary business includes the lending of money. A superficial loss under subsection 18(13) of the Act is a loss realized by a taxpayer on the sale or transfer of a property (other than a capital property) such as a share, bond or mortgage, where the same or identical property is acquired by the taxpayer or a non-arm's length person during the period beginning 30 days before and ending 30 days after the disposition, and is held by the taxpayer or the non-arm's length person at the end of the period. Subsection 18(15) of the Act describes the deferral itself and any loss that would otherwise be deductible with respect to a property is preserved in the transferor's hands and is deductible by the transferor upon the occurrence of any of the following events:

- a subsequent disposition of the property to a person that is neither the transferor nor a person affiliated with the transferor (provided that for 30 days after that subsequent disposition neither the transferor nor an affiliated person owns either the substituted property or an identical property acquired after the beginning of the period described above)

- a "deemed disposition" of the property under section 128.1 (change of residence) or subsection 149(10) of the Act (change of taxable status)

- in the case of a corporation, an acquisition of the corporation's control, or

- where the transferor is a corporation, a winding-up of the transferor (other than a winding-up under subsection 88(1) of the Act)

Accordingly, where a money lender transfers a property (other than a capital property) to an affiliated person at a loss, the loss is preserved and is deductible by the money lender on the eventual liquidation of the property by the affiliated person.

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