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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Whether subparagraph 40(2)(g)(ii) would deny a capital loss, where a shareholder has loaned funds to a corporation interest free?
Position: Question of Fact
Reasons: Based on the Byram decision, where a clear nexus between the shareholder and the corporation's dividend income can be demonstrated, subparagraph 40(2)(g)(ii) should not be applied to deny the capital loss.
2003-003875
XXXXXXXXXX Karen Power, CA
(613) 957-8953
January 14, 2004
Dear XXXXXXXXXX:
Re: Subparagraph 40(2)(g)(ii) and Subsections 40(3.3) & (3.4)
We are writing in reply to your letter of September 10, 2003, wherein you requested our views on whether subparagraph 40(2)(g)(ii) of the Income Tax Act (the "Act") would apply to deny a capital loss to a taxpayer, where the debtor is a wholly owned subsidiary of the taxpayer. In addition, you have asked whether the stop-loss rules in subsections 40(3.3) and 40(3.4) would apply to this same situation.
The particular circumstances in your letter on which you have asked for our views appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. As your situation involves a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to offer the following general comments, which may be of assistance.
As you are aware, as indicated in our file 2002-0151337, the Canada Revenue Agency has accepted the decision of the Federal Court of Appeal in Her Majesty the Queen v. Edwin J. Byram, 99 DTC 5117. In our view, when the debtor is a wholly owned subsidiary of the taxpayer, a clear nexus between the taxpayer and potential dividend income from the debtor can be demonstrated for purposes of subparagraph 40(2)(g)(ii) of the Act.
We agree with your analysis that the provisions of subsection 40(3.4) would not apply where there has been no acquisition by the taxpayer or a person affiliated with the taxpayer of substituted property during the period that begins 30 days before and ends 30 days after the disposition of the inter-company debt.
Please note, however, that we are not in a position to comment on the amount of the capital loss and whether, for example, section 247 of the Act could apply to the transactions described in your letter. In addition we have not commented on the tax implications to the wholly-owned subsidiary, in particular the calculation of any foreign accrual property income. Such determinations require a review of all relevant facts of each particular case.
We trust our comments will be of assistance to you.
Yours truly,
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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