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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 the transferor's loss to be nil in three given fact situations.
Position: Subsections 40(3.3) and 40(3.4) would not apply to deem the transferor's loss to be nil in the first given fact situation. Based on CCRA's administrative position, subsections 40(3.3) and 40(3.4) would be considered to apply to deem a portion only of the transferor's loss to be nil in the second given fact situation. Finally, subsections 40(3.3) and 40(3.4) would apply to deem the transferor's loss to be nil in the third given fact situation.
Reasons: Wording of the Act and current positions.
XXXXXXXXXX 2003-003746
S. Prud'Homme
(613) 957-8975
October 30, 2003Dear Sir,
Subject: Request for a technical interpretation of subsections 40(3.3) and 40(3.4) of the Income Tax Act
This is in response to your fax of September 8, 2003, in which you asked for our views on the application of subsections 40(3.3) and 40(3.4) of the Income Tax Act (the "Act") in particular situations. Unless otherwise indicated, all references to a statutory section or included provision in this letter are to a section of the Act or one of its provisions.
It appears to us that the situation described in your letter and summarized below may be an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its opinion. However, we are able to offer the following general comments that may be helpful. It should be noted that the application of one or more provisions of the Act generally requires an analysis of all the facts relating to a particular situation. Accordingly, and given that your letter only briefly describes hypothetical situations, our comments below may not be fully applicable in a particular situation.
1) Particular Situations
You have presented us with the three situations described below as part of your request for technical interpretation.
Assumptions Common to the Three Particular Situations
A taxpayer described in paragraph 40(3.3)(a) (the "Taxpayer") held a portfolio of shares issued by various public corporations.
Those shares were capital property to the Taxpayer.
On January 1, 2001, the Taxpayer held, inter alia, 100 common shares of "Pubco" and had held them for at least three months.
It is assumed for the purposes of this discussion that any disposition of Pubco shares described below would be to a person not affiliated with the Taxpayer.
First Hypothetical Situation
On June 1, 200X, the Taxpayer acquired an additional 50 common shares of Pubco.
On June 2, 200X, the Taxpayer disposed of those 50 additional common shares of Pubco and sustained a capital loss.
Furthermore, we understand that in this First Hypothetical Situation, it was possible to identify the 50 additional common shares of Pubco and the 100 other common shares of Pubco, and therefore it was possible to distinguish the 50 additional common shares from the other common shares of Pubco held by the Taxpayer.
Second Hypothetical Situation
On June 1, 200X, the Taxpayer disposed of the 100 shares of Pubco common stock it already held and sustained a capital loss.
On June 2, 200X, the Taxpayer acquired an additional 50 common shares of Pubco.
Third Hypothetical Situation
On June 1, 200X, the Taxpayer disposed of 50 of the 100 common shares of Pubco it already held and sustained a capital loss.
On June 2, 200X, the Taxpayer acquired an additional 50 common shares of Pubco.
2) Your Questions about this Case
For each of the hypothetical situations described above, you wish to know whether the Canada Customs and Revenue Agency (the "CCRA") considers that the Taxpayer's capital loss would be deemed to be nil pursuant to subsections 40(3.3) and 40(3.4).
If so, you would like to know when the Taxpayer could realize the Taxpayer’s deemed nil capital loss.
You are of the view that, in the context of the First Hypothetical Situation, subsections 40(3.3) and 40(3.4) would not apply to deem the Taxpayer's loss to be nil.
You are of the view that, in the context of the Second Hypothetical Situation, subsections 40(3.3) and 40(3.4) would apply to deem part of the Taxpayer's loss to be nil. Specifically, based on the algebraic formula proposed by the CCRA, you are of the view that one-half of the Taxpayer's loss would be deemed to be nil under paragraph 40(3.4)(a), with the other half of the loss realized immediately by the Taxpayer.
You are of the view that, in the context of the Third Hypothetical Situation, subsections 40(3.3) and 40(3.4) would apply to deem all of the Taxpayer's loss to be nil.
We agree with your position that, in the First Hypothetical Situation, subsections 40(3.3) and 40(3.4) would not apply to deem the Taxpayer's loss to be nil.
Thus, the Taxpayer disposed of the additional 50 common shares of Pubco on June 2, 200X (paragraph 40(3.3)(a)).
In addition, during the period beginning 30 days before and ending 30 days after the disposition described above (i.e., June 1, 200X), the Taxpayer acquired the same property referred to in the preceding paragraph (i.e., the 50 additional common shares of Pubco, referred to as "Replacement Property") (paragraph 40(3.3)(b)).
However, at the end of that period, we are of the view that the Taxpayer or a person affiliated with the Taxpayer did not own the Replacement Property (i.e., the 50 additional common shares of Pubco, all of which were disposed of on June 2, 200X). Since the condition set out in paragraph 40(3.3)(c) is not satisfied, subsection 40(3.4) would not apply.
It should be noted that the adjusted cost base ("ACB") to the Taxpayer of the 50 additional common shares of Pubco should be determined taking into account the terms of subsection 47(1). In particular, these 50 additional common shares of Pubco were identical property to the 100 common shares of Pubco held by the Taxpayer on January 1, 2001. The determination of this ACB taking into account subsection 47(1) could therefore have an impact on the calculation of the amount of the capital loss sustained by the Taxpayer on the disposition on June 2, 200X of the 50 additional common shares of Pubco.
We agree with your position that, in the context of the Second Hypothetical Situation, subsections 40(3.3) and 40(3.4) would be considered to apply to deem part of the Taxpayer's loss to be nil.
Thus, the Taxpayer disposed on June 1, 200X of the 100 common shares of Pubco that it already had held (paragraph 40(3.3)(a)).
In addition, during the period beginning 30 days before and ending 30 days after the disposition described above (i.e., June 2, 200X), the Taxpayer acquired property identical to the common shares of Pubco referred to in the preceding paragraph (i.e., the 50 additional common shares of Pubco, referred to as "Replacement Property") (paragraph 40(3.3)(b)).
Finally, at the end of that period, the Taxpayer would own the Replacement Property (i.e., the 50 additional common shares of Pubco) (paragraph 40(3.3)(c)).
Since the conditions of subsection 40(3.3) are satisfied, subsection 40(3.4) would apply. Under the CCRA's administrative position, only one-half of the Taxpayer's loss would be considered to be nil under paragraph 40(3.4)(a). This result would be obtained by the following algebraic formula:
Deemed nil loss = (the lesser of S, P and B) / S x L
where
|
S = the number of shares disposed of at that time
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100
|
|
P = the number of shares acquired during the period described in paragraph 40(3.3)(b)
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50
|
|
B = the number of shares remaining at the end of that period
|
50
|
|
L = the loss on the disposition otherwise determined
|
|
|
And therefore: Deemed nil loss =
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50 / 100 x L
|
The one-half of the Taxpayer's loss considered by the CCRA to be nil pursuant to paragraph 40(3.4)(a) would be deemed to be the Taxpayer's loss from a disposition of the property immediately before the earliest of the times described in paragraphs 40(3.4)(b)(i) to (v) occurring after the disposition of the 100 common shares of Pubco.
We agree with your position that, in the Third Hypothetical Situation, subsections 40(3.3) and 40(3.4) would apply to deem the entire loss sustained by the Taxpayer to be nil.
Thus, the Taxpayer disposed on June 1, 200X of 50 of the 100 common shares of Pubco that it had already held (paragraph 40(3.3)(a)).
In addition, during the period beginning 30 days before and ending 30 days after the above disposition (i.e., June 2, 200X), the Taxpayer acquired property identical to the common shares of Pubco referred to in the preceding paragraph (i.e., the 50 additional common shares of Pubco, referred to as "Replacement Property") (paragraph 40(3.3)(b)).
Finally, at the end of this period, the Taxpayer owned the Replacement Property (i.e., the 50 additional common shares of Pubco) (paragraph 40(3.3)(c)).
Since the conditions set out in subsection 40(3.3) were satisfied, subsection 40(3.4) would apply. Thus, the entire loss of the Taxpayer would be deemed to be nil pursuant to paragraph 40(3.4)(a). The Taxpayer's loss would be deemed to be its loss from a disposition of the property immediately before the earliest of the times described in paragraphs 40(3.4)(b)(i) to (v) that occurred after the disposition of the 50 Pubco common shares.
Please note that this opinion is not an advance ruling and, as stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is not binding on the CCRA with respect to any particular factual situation.
We hope that our comments are of assistance.
Best regards,
Stéphane Prud'Homme, Notary, M. Fisc.
For the Director
Corporate Reorganizations and Industrial Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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