Words and Phrases - "substituted"
22 June 2016 Internal T.I. 2016-0632821I7 F - 93(2.01) & Capital Contribution
Canco contributed (for no share consideration) its shares of a non-resident Finco subsidiary (Luxco2 – which previously had paid exempt dividends to Canco) to another wholly-owned subsidiary (Luxco1). CRA found that s. 93(2.01) denied a subsequent capital loss realized on an arm’s length sale of the Luxco1 shares to the extent of such dividends, on the grounds that the shares of Luxco1 were substituted shares for those of Luxco2. The Directorate stated:
The concept of "substituted share" in subsection 93(2.01) must in our view be given its ordinary meaning, taking into account inter alia that the interpretive rule in subsection 248(5) does not stipulate a definitive meaning for this concept for the purposes of the Act.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 93 - Subsection 93(2.01) | a contribution of FA1 shares to FA2 causes the FA2 shares to be substituted property for s. 93(2.01) purposes | 195 |
| Tax Topics - Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(a) - Subparagraph 95(2)(a)(ii) - Clause 95(2)(a)(ii)(B) | inter-affiliate loan generating deemed active business funded out of an interest-free loan from Canco | 105 |
26 May 2016 IFA Roundtable Q. 7, 2016-0642121C6 - 93(2.01) & Capital Contribution
CRA considered that the s. 93(2.01) stop loss rule applied where Canco made a contribution of capital to a foreign subsidiary (FA2) of its shares of a non-resident Finco subsidiary (FA1) which had paid dividends out of its deemed active business income to Canco – so that s. 93(2.01) denied a subsequent capital loss realized on an arm’s length sale of the FA2 shares to the extent of such dividends. This was so even though the contribution did not entail any exchange of property and even though the FA1 shares likely would never have generated an accrued loss (with CRA observing in its oral comments that “there is no purpose test inherent in subsections 93(2) and (2.01), and other similar rules.)
CRA stated:
[W]e may be prepared to develop administrative solutions to the extent this could result in double-counting, or the same dividends being counted, or producing two or more losses.
18 June 2015 STEP Roundtable Q. 11, 2015-0578551C6 - 2015 STEPQ11-Subsection 118.1(5.1)-sub property
Amended s. 118.1(5.1) require that a donation be a gift of "property that was acquired by the estate on and as a consequence of the death" or "property that was substituted for that property." The individual, at death after 2015, held "Holdco" owning appreciated marketable securities. The estate is directed by will to make a donation.
Scenario 1
Holdco sells the securities and pays a dividend to the graduated rate estate, which makes the donation. Would the cash from the dividend be considered substituted property?
CRA responded that the estate has not replaced the Holdco shares received on death, so that the cash dividend is not property substituted for the Holdco shares. As the requirement in s. 118.1(5.1)(b) is not met, only the estate could claim a donation in the year or in the five subsequent taxation years.
Scenario 2
Estate transfers the shares of Holdco under s. 85(1) to Newco and takes back high PUC shares of Newco. Holdco is wound up and Newco receives the marketable securities (whose adjusted cost base has been "bumped" under s. 88(1)(d).) Newco uses the proceeds of sale of the securities to purchase for cancellation some of the estate's shares. Estate uses such cash to make the charitable donation. Is the donation is made with substituted property?
CRA responded that, as the shares of Holdco (which were received on death) are disposed of in exchange for the Newco shares, the Newco shares are substituted property. Furthermore, the cash received on the purchase for cancellation would be substituted property for the cancelled Newco shares and, under the extended meaning of "substituted property" in s. 248(5)(a), that cash also would be substituted property for the Holdco shares. Accordingly, s. 118.1(5.1)(b) would be satisfied.