7 July 1999 External T.I. 9911325 - SECTION 48.1 AND SUBSECTION 74.2(2)48.1

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:

Whether a taxable capital gain resulting from an election under section 48.1 by a wife, and attributed to the husband under subsection 74.2(1), would be eligible for the capital gains deduction in the husband’s hands. The concern arises in that section 48.1 deems a disposition to occur immediately before the corporation described therein ceases to be a small business corporation (“SBC”), which may be at a particular time on a particular day, whereas paragraph 74.2(2)(b) is worded more broadly and deems the disposition to occur “on the day”, without specifying at which time of the day.

Position TAKEN:

By virtue of subsection 74.2(2), a taxable capital gain resulting from an election under section 48.1 and attributed to an individual under subsection 74.2(1), will be deemed, for purposes of the capital gains deduction, to have arisen on a disposition by the individual at the time provided in section 48.1 (i.e., immediately before the corporation ceases to be a SBC).

Reasons FOR POSITION TAKEN:

The reference to “the day” in paragraph 74.2(2)(b) is not restricted to a specified time, and therefore gives the Department the flexibility to adopt the above position. This position reflects the intent of both section 48.1 and subsection 74.2(2).

XXXXXXXXXX 5-991132
M. Azzi
July 7, 1999

Dear Madam:

Re: Section 48.1 and Subsection 74.2(2) of the Income Tax Act (the “Act”)

This is in reply to your letter of April 23, 1999, wherein you requested our views on the application of the above-noted provisions in a particular situation involving shares which were gifted from a husband to his wife (where the husband did not elect out of subsection 73(1) of the Act). In particular, you have requested confirmation as to whether a taxable capital gain resulting from an election under section 48.1 of the Act by the wife, and attributed to the husband under subsection 74.2(1) of the Act (assuming, of course, that subsection 74.5(11) of the Act does not apply), would be eligible for the capital gains deduction in the husband’s hands. In this regard, you note that section 48.1 of the Act deems a disposition to occur immediately before the corporation described therein ceases to be a small business corporation (“SBC”), which may be at a particular time on a particular day, whereas paragraph 74.2(2)(b) of the Act is worded more broadly and deems the disposition to occur “on the day”, without specifying at which time of the day.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3, dated December 30, 1996. Where the particular transactions are completed, the enquiry should be addressed to the relevant tax services office. However, we are prepared to offer the following general comments.

The election under section 48.1 of the Act is available where, inter alia, at any time in a taxation year an individual owns capital property that is a share of a class of the capital stock of a SBC which, immediately after that time, ceases to be a SBC because a class of its shares is listed on a prescribed stock exchange. In general terms, this election provides for a deemed disposition of the shares, at an elected amount, by the individual immediately before the corporation ceases to be a SBC, and reacquisition of the shares, at that amount, by the individual at the time the corporation ceases to be a SBC. As discussed in the 1991 Budget Supplementary Information, this provision is intended to ensure that individuals do not lose their entitlement to the enhanced capital gains exemption in cases where the shareholder finds it unacceptable to dispose of the shares prior to the initial public offering due to the shareholder's desire to continue to participate in the growth of the corporation after it has gone public.

Where subsection 74.2(1) of the Act attributes a taxable capital gain or allowable capital loss to an individual from another person, subsection 74.2(2) of the Act deems, for purposes of the capital gains deduction under section 110.6 of the Act, the gain or loss to have arisen from the disposition by the individual of the property on which the gain or loss was realized, and on the day the property was disposed of by the other person. Subsection 74.2(2) of the Act is intended to ensure that gains and losses attributed to an individual under specific provisions (including subsection 74.2(1) of the Act) are taken into account in determining the individual’s entitlement to the capital gains deduction; that is, that they retain their nature in the individual’s hands for purposes of the capital gains deduction. Accordingly, in our view, by virtue of subsection 74.2(2) of the Act, a taxable capital gain resulting from an election under section 48.1 of the Act and attributed to an individual under subsection 74.2(1) of the Act, will be deemed, for purposes of the capital gains deduction, to have arisen on a disposition by the individual at the time provided in section 48.1 of the Act (i.e., immediately before the corporation ceases to be a SBC).

We trust that these comments will be of assistance.

Yours truly,

Jim Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch