7 January 2002 External T.I. 2001-0100155 - TRANSFER OF CAPITAL LOSSES

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 a taxpayer can transfer unrealized capital losses to the taxpayer's spouse by way of a sale at fair market value.

Position TAKEN:

Yes, subject to application of superficial loss rules.

Reasons:

If the sale occurs at fair market value and the transferee still holds the capital property or substitute property at end of 30 days, the superficial loss rules deny the taxpayer's capital loss and the denied loss is added to adjusted cost base of the spouse's capital property. The subsection 73(1) of the Act election prevents the transfer at adjusted cost base and section 74.5 of the Act prevents the attribution of the future capital loss back to transferor.

XXXXXXXXXX 2001-010015
J. E. Grisé
January 7, 2002

Dear Sir:

Re: Transfer of Unrealized Capital Losses to Spouse

This is in reply to your letter of August 31, 2001, requesting our views on whether unrealized capital losses can be transferred between spouses. Included with your letter was an article from Canadian MoneySaver describing a method that attempts to accomplish the transfer.

In the example provided in the article, the Husband has realized capital gains and the Wife has securities with unrealized capital losses (the "Securities"). The Wife would sell the Securities to the Husband at fair market value. As consideration, the Husband would pay for the Securities using cash, in-kind consideration or a loan at the Canada Customs and Revenue Agency prescribed rates. The Securities would then be sold by the Husband in the market. The Wife would file an election with her income tax return stating that she elects not to have the provisions of subsection 73(1) of the Income Tax Act (the "Act") apply on the transfer to the Husband.

Our Comments

Subsection 73(1) of the Act provides that when a taxpayer (Wife in the above example) transfers capital property to a spouse (Husband in the above example) and they are both resident of Canada at the time, the property is deemed to have been disposed of by the Wife for proceeds equal to the adjusted cost base of the property. The Husband 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 Husband is attributed to the Wife by virtue of subsection 74.2(1) of the Act. The Wife may elect in her tax return for the year of the transfer to not have the provisions of subsection 73(1) apply. If the election is made and fair market value consideration was received by the Wife, subsection 74.5(1) of the Act provides that the gain or loss from a disposition of the property by the Husband will not be attributed to the Wife in any year in which the Husband subsequently disposes of the property.

As a result of the election, and subject to paragraph 53(1)(f) of the Act (see below), the adjusted cost base of the Securities to the Husband will be equal to the amount paid by the Husband, which in the circumstances described, is equal to the fair market value of the Securities.

Section 54 of the Act defines a superficial loss as follows:

"superficial loss" of a taxpayer means the taxpayer's loss from the disposition of a particular property where

(a) during the period that begins 30 days before and ends 30 days after the disposition, the taxpayer or a person affiliated with the taxpayer acquires a property (in this definition referred to as the "substituted property") that is, or is identical to, the particular property, and

(b) at the end of that period, the taxpayer or a person affiliated with the taxpayer owns or had a right to acquire the substituted property,

except where the disposition was...

Therefore in the above scenario, if at the end of 30 days after the sale to the Husband, either the Husband or the Wife still owns the Securities, identical securities, or the right to acquire the Securities or identical securities, the capital loss realized by the wife will be deemed a "superficial loss". Under paragraph 40(2)(g) of the Act, the capital loss realized by the Wife on the sale to the Husband will, generally, be nil and the denied loss will be added to the adjusted cost base of the Securities now owned by the Husband pursuant to paragraph 53(1)(f) of the Act. As a result of the application of the superficial loss rules, the adjusted cost base of the Securities to the Husband will, generally, be equal to the adjusted cost base of the Securities to the Wife at the time the Securities were sold to the Husband. If the Husband later sells the Securities in the market, any capital loss realized will be the Husband's. As a result, the Wife will have effectively transferred her unrealized capital loss to the Husband.

On the other hand, if the Husband sells the Securities within 30 days of purchasing them from the Wife and, at the end of the 30 day period, neither the Husband nor the Wife own, or have the right to acquire, the Securities or identical securities, the Wife's capital loss on the sale of the Securities to the Husband will not be a superficial loss and the capital loss will remain the Wife's. Assuming the Husband sold the Securities for the same price that he paid the Wife, the Husband's capital loss would be nil.

The rules concerning transfers of property between spouses are discussed in greater detail in Interpretation Bulletin IT-511R "Interspousal and Certain Other Transfers and Loans of Property" (copy enclosed).

We trust our comments will be of assistance to you.

Yours truly,

John Oulton, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

Enclosure