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.
Principal Issues: examination of two separate scenarios involving trusts, affiliated rules & stop loss provisions
Position: In both scenarios presented the loss would be denied
Reasons: Where the trust controls the estate/trust before & after a redemption of shares, it is the trust that is affiliated regardless of the fact that the trustees are not affiliated.
2000-005234
XXXXXXXXXX L. Holloway
(613) 957-2104
February 20, 2001
Dear XXXXXXXXXX:
Re: Request for Technical Interpretations
Subsection 40(3.6) and Section 251.1 of the Income Tax Act
This is in response to your letter dated October 20, 2000 requesting a technical interpretation on the operation of subsection 40(3.6) and the definition of affiliated in section 251.1. We apologize for the delay in our response. The two situations outlined in your letter follow:
Situation 1
1. Brother 1 and Sister are joint trustees of the Trust.
2. The Trust controls Company C.
3. A second brother (Brother 2) owns non-voting common shares of Company C.
4. Brother 1 and Sister do not hold shares of Company C personally.
5. An affiliated group does not control Company C, as siblings are not affiliated with one another.
Situation 2
1. A Spousal trust (the "Trust") has two joint trustees, say Trustee A and B.
2. Trustee A is not related or affiliated with Trustee B.
3. The Trust holds all issued common and preferred shares of Company A.
4. Neither Trustee owns shares of Company A individually.
5. Company A redeems a portion of the preferred shares held by the Trust.
6. The Trust controls Company A before and after the redemption of shares.
Subsection 40(3.6) will deny a loss incurred by a taxpayer on the disposition of a share of a corporation if the taxpayer, immediately after the disposition of the share, is affiliated with the corporation.
We have recently issued technical interpretations on the interaction of subsections 40(3.6) and 251.1(1) where a trust or estate is also involved. These documents which are available through the various tax data services (see our document numbers 1999-001080, 1999-001082, and 1999-001570) basically state the following:
1. Where an estate, which has more than one executor none of whom is affiliated with another, does not itself have control over a corporation, but the corporation is controlled by a related group consisting of the executors, the estate would not normally be affiliated with the corporation as it is not a person described in (a), (b) or (c) of the definition of affiliated person. This response assumes that under the terms of the will any decision requires majority approval by the executors.
2. In the situation where Mr. A owns all of the voting common shares of a corporation ("Aco") and an inter vivos trust ("Trust") owns all the non-voting preferred shares of Aco, if Aco were to redeem some of the preferred shares of the Trust the loss would be denied under subsection 40(3.6). As Mr. A owns all the voting shares of Aco, he would be a person affiliated with Aco by virtue of subparagraph 251.1(1)(b)(i). Further, as sole trustee of the Trust, Mr. A is the legal owner of those shares. By virtue of paragraph 251.1(4)(a), Mr. A as trustee is affiliated with himself as controller of Aco. Therefore the amount of any capital loss arising on the redemption of the preferred shares would be denied pursuant to subsection 40(3.6).
Based on these previous interpretations we offer the following comments on the situations presented in your letter.
In situation 1, even though the trustees are non-affiliated, we would consider the Trust to be affiliated with the corporation under subparagraph 251.1(1)(b)(i) as the Trust has control over the corporation. Therefore, if Company C redeemed a sufficient number of shares so to trigger a loss in the Trust but the Trust retained control after the redemption, the loss would be denied under subsection 40(3.6). If on the other hand, all shares held by the Trust were redeemed and Brother 2 held the remaining shares of Company C the loss would not be denied to the Trust.
In situation 2, we would also consider the Trust to be affiliated with the corporation under subparagraph 251.1(1)(b)(i) even though the trustees are non-affiliated. As the Trust has control over the corporation before and after the redemption, the loss would be denied.
The interpretation of section 251.1 as it relates to estates and trusts is not entirely clear. It is, however, our understanding that the Department of Finance is aware of the ambiguities associated with the affiliated rules in this regard and has noted that amending legislation may be required.
We trust the above is of assistance.
Yours truly,
T. Murphy
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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