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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: Whether subsections 40(3.3) and 40(3.4) would apply to deem a corporate taxpayer's loss to be nil in three different hypothetical situations.
Position: Taking as granted that the taxpayer would select among the Publico shares owned at a particular time the substituted property as being the first shares disposed of; in the First and Second Hypothetical Situation, both losses would not be deemed to be nil pursuant to paragraph 40(3.4)(a) as the condition set out in paragraph 40(3.3)(c) would not be met; and in the Third Hypothetical Situation, the corporate taxpayer's loss deemed to be nil pursuant to paragraph 40(3.4)(a) would be an amount of $41.67.
Reasons: Based on previous administrative positions.
XXXXXXXXXX
2014-052973
J. Lafrenière
(613) 941-2956
July 2, 2014
Subject: Request for technical interpretation-- Subsections 40(3.3) and 40(3.4) of the Income Tax Act
Dear Sir,
This is in response to your e-mails of April 30 and June 3, 2014, in which you requested our opinion regarding the application of subsections 40(3.3) and 40(3.4) of the Income Tax Act (hereinafter "the Act") in respect of three hypothetical situations that you have submitted.
Unless otherwise indicated, any reference to a statute of law or one of its provisions in this document is a reference to a section of the Act or any of its provisions.
This technical interpretation provides general comments on the provisions of the Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings and Technical Interpretations.
A. Facts
First Hypothetical Situation
1. On January 1, 201X, a corporation (hereinafter "Investco") acquires 1,000 common shares in the capital stock of a public corporation (hereinafter "Pubco "). These shares constitute capital property to Investco. On December 15, 201X, Investco acquires 200 common shares in the capital stock of Pubco. These shares also constitute capital property to Investco.
2. On December 16, 201X, Investco disposes of 200 common shares in the capital of Pubco to an unaffiliated person and realizes a loss of $400.
3. On December 31, 201X, Investco disposes of 200 common shares in the capital of Pubco to an unaffiliated person and realizes a loss of $500.
Second Hypothetical Situation
1. On February 1, 201X, Investco acquires 100 common shares in the capital stock of Pubco. These shares constitute capital property to Investco.
2. On February 28, 201X, Investco acquires 50 common shares in the capital stock of Pubco. These shares also constitute capital property to Investco.
3. On March 15, 201X, Investco disposes of 60 common shares in the capital stock of Pubco to an unaffiliated person and realizes a loss of $100.
4. On March 16, 201X, Investco disposes of 50 common shares of Pubco's capital to an unaffiliated person and does not realize any capital gain or loss.
Third Hypothetical Situation
The facts relating to the Third Hypothetical Situation are identical to those of the Second Hypothetical Situation except that Investco disposes of 25 common shares in the capital stock of Pubco on March 16, 201X to an unaffiliated person.
B. Your questions
First Hypothetical Situation
Referring to document number 2003-0002915 issued by our Directorate, you submit that a taxpayer can choose the order of disposition of shares that are identical property.
In this regard, assuming that Investco chooses to treat the 200 common shares in the capital of Pubco sold on December 31, 201X as a disposition of those acquired on December 15, 201X (hereinafter "Replacement Property"), you asked whether subsections 40(3.3) and 40(3.4) apply in order for some or all of the losses realized on December 16 and December 31, 201X to be deemed to be nil.
Second Hypothetical Situation
You are of the view that only a fraction of the loss of $100, calculated in accordance with the algebraic formula proposed by our Directorate in document number 2001-0088155, should be deemed to be nil under subsections 40(3.3) and 40(3.4) . Based on your calculations, the amount of the loss deemed to be nil is $83.33.
You wish to know if the loss of $83.33 could cease in whole or in part to be suspended by reason of the sale by Investco of 50 common shares in the capital stock of Pubco on March 16, 201X. Referring to document number 2003-0002915, you are of the view that the total amount of $83.33 would cease to be suspended.
Third Hypothetical Situation
You asked the same question with respect to the Second Hypothetical Situation, taking into account the sale by Investco of 25 common shares in the capital stock of Pubco on March 16, 201X.
C. Our comments
Subsection 40(3.4) applies where the conditions set out in subsection 40(3.3) are met. These conditions are as follows:
1. Paragraph 40(3.3)(a): A corporation, trust or partnership (referred to in subsections 40 (3.3) and 40(3.4) as the "transferor") disposes of a particular capital property, other than, inter alia, depreciable property of a prescribed class, otherwise than in a disposition described in any of paragraphs (c) to (g) of the definition “superficial loss” in section 54.
2. Paragraph 40(3.3)(b): During the period that begins 30 days before and ends 30 days after the disposition, the transferor or a person affiliated with the transferor acquires a property (referred to in subsection 40(3.3) and subsection 40(3.4) as the “substituted property”) that is, or is identical to, the particular property.
3. Paragraph 40 (3.3)(c): At the end of the period, the transferor or a person affiliated with the transferor owns the substituted property.
Where these conditions are met, subsection 40(3.4) states inter alia that:
1. Paragraph 40(3.4)(a): The transferor’s loss from the disposition is deemed to be nil.
2. Paragraph 40(3.4)(b): The amount of the transferor's loss from the disposition (determined without reference to paragraph 40(2)(g) and subsection 40(3.4)) is deemed to be a loss from a disposition of the property at the time that is immediately before the first time described in subparagraph 40(3.4)(b)(i) to (v) that is after the disposition.
More specifically, the time described in subparagraph 40(3.4)(b)(i) is the beginning of a 30-day period throughout which neither the transferor nor a person affiliated with the transferor owns the substituted property or property that is identical to the substituted property and that was acquired after the day that is 31 days before the period begins.
We have assumed that in the three hypothetical situations submitted, Investco would choose to dispose of, firstly, the Substituted Property on a subsequent sale of identical properties consisting of common shares in the capital of Pubco, given the long-standing position of our Directorate allowing such a choice.
First Hypothetical Situation
In light of the above, in order to answer your question with respect to the First Hypothetical Situation, it is first necessary to determine whether all the conditions for the application of subsection 40(3.3) are met.
First, Investco disposes on December 16, 201X of shares in the capital stock of Pubco (hereinafter, the "Relevant Shares") which are capital property to Investco (paragraph 40(3.3)(a)). This disposition results in a capital loss.
Then, during the period that begins 30 days before and ends 30 days after the disposition of the Relevant Shares, Investco acquires, on December 15, 201X, the Substituted Property (paragraph 40(3.3)(b)).
For the purposes of paragraph 40(3.3)(c), Investco has chosen that the 200 shares in the share capital stock of Pubco which it disposed of on December 31, 201X were the Substituted Property; it follows that at the end of the 60-day specified period, Investco or a person affiliated with it was not be the owner of the Substituted Property (paragraph 40(3.3)(c)).
As the condition specified in paragraph 40(3.3)(c) was not satisfied, the losses of $400 and $500 realized by Investco were not deemed to be nil under paragraph 40(3.4)(a).
Second Hypothetical Situation
For the same reasons referred to respecting the First Hypothetical Situation, the loss of $100 realized by Investco would not be deemed to be nil under paragraph 40(3.4)(a).
Third Hypothetical Situation
As with the Second Hypothetical Situation, the conditions set out in paragraphs 40(3.3)(a) and 40(3.3)(b) would be satisfied.
However, since Investco would still be the owner of a portion of the Substituted Property at the end of the prescribed 60-day period, namely 25 shares in the capital stock of Pubco acquired on February 28, 201X, paragraph 40(3.3)(c) would also be fulfilled.
We are therefore of the view that part of the loss realized by Investco on the March 15, 201X sale would be deemed to be nil under paragraph 40(3.4)(a). The part of the loss sustained by Investco that could be deemed to be nil for the purposes of paragraph 40(3.4)(a) could be determined using the following algebraic formula:
The denied loss = A / B x C
where
A was the number of shares of Publico comprising the Replacement Property at the end of the period (25),
B was the number of Publico shares sold on March 15, 201X (60), and
C was the loss resulting from the disposition of the share of Publico on that date ($100).
Accordingly:
The denied loss = 25/60 X $100= $41.67.
This loss could be recognized where the conditions for the application of paragraph 40(3.4)(b) were met.
We hope that our comments will be of assistance.
Best regards,
Maurice Bisson, CPA, CGA
Manager
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy
and Regulatory Affairs Branch
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