12 May 1997 External T.I. 9706435 - CAPITAL GAIN VS INTEREST INCOME ON DISPOSITION OF A BOND

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 there is a capital loss on disposition of bond to controlled corporation and whether on the subsequent disposition by the corporation it is income or capital.

Position:

As the transaction occurred prior to April 26, 1995 subsection 85(4) applies and it is a question of fact whether the gain is on account of income or capital

Reasons:

Facts in case

XXXXXXXXXX 970643

May 12, 1997

Dear XXXXXXXXXX:

Re: Capital Gain Vs. Interest Income on Disposition of a Bond

This is in reply to your facsimile of March 7, 1997 in which you request a technical interpretation concerning the treatment of a gain on the disposition of a bond.

The situation described in your letter appears to be an actual fact situation and written confirmation of the tax implications inherent in proposed transactions are given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R3. Where a completed transaction is involved, the enquiry should be addresses to your local District Tax Services Office. Consequently, we can only offer the following general comments.

Where a shareholder controls a corporation immediately after the disposition of any capital property (other than depreciable property of a prescribed class) or eligible capital property to the corporation, the capital loss otherwise determined in respect of the disposition would be deemed to be nil pursuant to paragraph 85(4)(a) of the Income Tax Act (the "Act"), and the adjusted cost base of the shares of a particular class owned by the shareholder immediately after the disposition would be increased pursuant to paragraph 85(4)(b) of the Act.

Subsection 85(4) of the Act has been repealed and replaced by new subsections 14(12) and 40(3.3) to 40(3.6) of the Act for dispositions that take place after April 26, 1995. Consequently, in your situation, it is our opinion that the provisions of paragraph 85(4) would apply to deny the capital loss on the transfer of the bond to the shareholder's corporation.

With respect to the gain on the disposition of the bond by the corporation, it would be a question of fact whether the gain would be considered on account of capital or income, which could only be determined after examining all the facts in the case.

For information purposes we have enclosed a copy of Interpretation Bulletin IT-291R2.

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

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