19 January 1998 External T.I. 9726485 - TRANSFER OF CAPITAL LOSSES BETWEEN SPOUSES

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.

ISSUE:

Whether recipient of capital property can realize capital loss on disposition of shares transferred for fmv from spouse.

Position: Yes.

Reasons:

If transfer occurs at fmv, superficial loss rules deny transferor the loss; denied loss is added to acb of transferee's shares; 73(1) election prevents roll at acb and attribution of capital gains/losses back to transferor caused by 74.2

972648
XXXXXXXXXX P. Spice

January 19, 1998

Dear XXXXXXXXXX

Re: Transfer of Capital Losses Between Spouses

Further to our letter of January 14, 1998, we obtained a copy of the article from the Globe and Mail to which you referred in your letter of June 15, 1997. We note that the situation described in the article differs from the situation on which we commented in our letter of January 14, 1998. We are, therefore, writing again to discuss the specific situation and tax treatment addressed by Tim Cestnick in the Globe and Mail (May 24, 1997).

To reiterate our earlier comments, subsection 73(1) of the Income Tax Act (the “Act”) provides that when a taxpayer transfers capital property to a spouse and they are both resident of Canada at the time, the property is deemed to have been disposed of by the taxpayer for proceeds equal to the adjusted cost base of the property. The spouse is also deemed to have acquired the capital property for an amount equal to those proceeds. Any taxable capital gain or allowable capital loss from the subsequent disposition of the property by the spouse is attributed to the taxpayer by virtue of subsection 74.2(1) of the Act. The taxpayer may elect in his or her tax return for the year of the transfer to not have the provisions of subsection 73(1) apply. If the election is made, paragraph 74.5(1)(c) of the Act provides that the gain or loss from a disposition of the property by the spouse will not be attributed to the taxpayer in any year in which the spouse subsequently disposes of the property.

As a result of the election the adjusted cost base of the shares to the spouse will be equal to the amount paid for them.

As discussed by Mr. Cestnick, if shares are sold at fair market value to a spouse, any capital loss realized is denied by virtue of the superficial loss rules as contained in paragraph 40(2)(g) and the definition of "superficial loss" in subsection 54(1) of the Act. In such an event, the amount of the loss which is denied to the taxpayer is added to the adjusted cost base of the shares to the spouse pursuant to paragraph 53(1)(f) of the Act. Therefore, when the spouse disposes of the shares at fair market value (assuming, of course, that the value of the shares has not risen since the spouse acquired them), a capital loss will be triggered in the hands of the spouse.

Note also that if shares are sold at fair market value, the provisions of subsection 69(1) which we discussed in our earlier letter do not apply.

We trust this additional information addresses the specific situation you were contemplating in your letter of

June 15, 1997.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate