a fellow shareholder ("Paulhus") of the corporation in question had paid a sum of money to the holders of defaulted mortgage debt of the corporation pursuant to a settlement agreement that also contemplated that the taxpayer would transfer to Paulhus all of his shares of another corporation ("Placid") in order to pay to Paulhus his share of the settlement payment;
the taxpayer satisfied this payment obligation to Paulhus;
as a consequence of the law of subrogation, Paulhus acquired the mortgage debt; and
by transferring his shares of Placid to Paulhus, the taxpayer acquired ½ of the indebtedness formerly owing to the mortgage holders that Paulhus had acquired from the mortgage holders.

The Trial Judge had incorrectly found that the taxpayer had not made the payment referred to in (2) above, and the matter was referred back to the Minister for reconsideration of the third and fourth points above, together with consideration as to whether the claim by the taxpayer in his return for a business investment loss represented an election under s. 50(1).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(12)		89

Administrative Policy

Calculating and reporting your capital gains and losses

Use the exchange rate that was in effect on the day of the transaction or, if there were transactions at various times throughout the year, you can use the average annual exchange rate.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(2)		33

Paragraph 40(1)(a)

Administrative Policy

28 April 2008 External T.I. 2007-0243711E5 F - Gains et pertes sur change

FX gains on U.S. securities transactions cannot be deferred until there is a conversion to Canadian funds

Regarding a requested clarification of the second part of paragraph 13 of IT-95R regarding the realization of a foreign exchange gain or loss on the use of foreign currency funds, and a query as to whether FX fluctuations, rather than being recognized on a transaction of purchase and sale of investments other than funds on deposit, can have their recognition deferred to when the foreign currency funds are exchanged for Canadian money, CRA stated:

[T]he use of foreign currency funds that could result in a foreign exchange gain or loss is not limited to the acquisition of negotiable instruments but also includes the acquisition of any other property. Consequently, assuming that the transactions are on capital account, there will be a foreign exchange gain or loss calculation in respect of foreign currency funds used to acquire the property that is the corporate shares purchased in the US market. …

Where there is a sale of foreign currency investments other than funds on deposit ("investments"), the CRA's position is that the gain or loss on the sale of the investments will be computed by converting the adjusted cost base and the proceeds of disposition of the investments into Canadian currency using the exchange rate prevailing at the relevant time. Specifically, the CRA's position is that the adjusted cost base is to be converted into Canadian currency using the exchange rate prevailing at the time of the acquisition of the subject investments, and the proceeds of disposition of the investments are to be converted into Canadian currency using the exchange rate prevailing at the time of disposition of those investments. … We do not allow an individual investor to use the method you advocate that would delay recognition of the foreign currency fluctuation.

Subparagraph 40(1)(a)(i)

Cases

Martin v. Canada, 2015 FCA 204

financial losses from loss of employment were not disposition expenses

The taxpayer's employment at his brokerage employer was terminated. He was unable to find replacement employment or to establish his own financial advisory business, so that he lost his clientele. He was unable to claim a capital loss of $14.8 million, computed as the fair market value of his clientele, and the value of property seized as a result of his ensuing financial troubles. He did not have a cost for his clientele (and the expenses incurred in building up his clientele had been deducted as business expenses) and his financial losses were not disposition expenses.

Gaynor v. The Queen, 91 DTC 5288, [1991] 1 CTC 470 (FCA)

different FX spot rates for cost and proceeds

In rejecting a submission that the capital gain realized by the taxpayer from the purchase and sale in U.S. dollars of U.S. securities should be computed by multiplying the gain measured in American currency by the exchange rate prevailing at the time of the disposition, Pratte J.A. stated that "both the cost of the securities and the value of the proceeds of disposition must be valued in Canadian currency which is the only monetary standard of value known to Canadian law" and that "once this is realized, it becomes clear that the cost of the securities to the appellant must be expressed in Canadian currency at the exchange rate prevailing at the time of their acquisition while the valuation of the proceeds of disposition of the same securities must be made in Canadian currency at the rate of exchange prevailing at the time of the disposition".

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Amount		62

The Queen v. Demers, 86 DTC 6411, [1986] 2 CTC 321 (FCA)

fmv deficiency an outlay

Although the price stipulated in the agreement for the sale of shares of a corporation ("Chibougamau") was $7,800,000, the agreement also provided that the vendors were required to use the sale proceeds to acquire from Chibougamau a debt owing to it by its subsidiary with a face amount of approximately $1,400,000 but a fair market value of only $600,000 (the difference being $800,000). Hugessen J.A., in his concurring reasons, found that the vendors were able to deduct $800,000 as an outlay or expense of the disposition (pp. 6413-6414):

"In my opinion it is not necessary for a payment to be made without any consideration for there to be a 'débours' or 'outlay' ... However, the provision recognizes that an outlay can be for more than one purpose: it is only 'to the extent' that it is made for the purposes of making the disposition that it can be taken into account in calculating the capital gain ... As it was not in dispute that in the case at bar the payment of $1,400,000 vested in the respondents property worth only $600,000, it follows that the sum of $800,000 was spent for purposes other than purchasing this property, namely for the disposition of their shares in Chibougamau."

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 54 - Proceeds of Disposition		130

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i)	fraudulent advance did not qualify as a loan	202

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Legal and other Professional Fees	investment dealer fees incurred respecting the advisability of making hostile takeover were fully deductible under s. 9	417
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb)	investment dealer fees re advisability of making hostile takeover were fully deductible	529
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(cc)	legal fees incurred in securing regulatory approval for a hostile bid related to the bidder's business of earning income from shares and interaffiliate sales	182
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(g)	takeover bid circular costs did not qualify	102
Tax Topics - Income Tax Act - Section 14 - Subsection 14(5) - Eligible Capital Expenditure	fees incurred in order to acquire shares were excluded/butterfly expenses excluded as taxpayer was not in the business of implementing corporate reorganizations	365
Tax Topics - Income Tax Act - Section 169 - Subsection 169(2.1)	raising general question of deductibility of fees and listing s. 20(1)(e) did not satisfy s. 165(1.11)	246
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e)	failure to advance evidence showing allocation of fees to share consideration	139
Tax Topics - Statutory Interpretation - French and English Version	finding common meaning of 2 versions of s. 20(1)(bb)	108

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base	probate fees added to cost	154

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Start-Up and Liquidation Costs		100
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Contract or Option Cancellation		94
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition	legal expenses incurred re cancellation of purchase may be loss from disposition	90
Tax Topics - Income Tax Act - Section 4 - Subsection 4(1) - Paragraph 4(1)(a)		152

Administrative Policy

7 October 2022 APFF Financial Strategies and Instruments Roundtable Q. 3, 2022-0943261C6 F - Average Exchange Rate

use of average exchange rates for capital property dispositions not generally accommodated

Can an average exchange rate be used in computing the gains or losses from the disposition of capital property? CRA responded:

As a general rule, the CRA will not accept the conversion of a gain or loss on the disposition of a capital property using an average exchange rate. A gain or loss is simply the arithmetic difference usually resulting from two or more separate transactions, a purchase and a sale, which generally occur on different dates. Consequently, the daily exchange rate for the particular dates should be used to determine, in Canadian dollars, the adjusted cost base ("ACB") of such property and any proceeds of disposition from its disposition.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 261 - Subsection 261(1) - Relevant Spot Rate	circumscribed acceptance of using average exchange rates	257
Tax Topics - Income Tax Act - Section 39 - Subsection 39(1.1)	use of average exchange rate under s. 39(1.1) is permitted	36

22 January 2020 External T.I. 2014-0559281E5 F - T5008

option writer can deduct its expenses from deemed s. 49(1) proceeds

The T5508 Guide states:

Report only the total proceeds in box 21. Do not deduct any expenses from the proceeds… .

Respecting the application of s. 49(1) to the writing and sale on an exchange of a naked call option and the T5008 reporting of the transaction “cost” of the option on the T5008 issued by the securities dealer, CRA did not reference the above statement, but effectively confirmed that it did not trench on how the gain was reported by the option writer. It stated:

The CRA's position is that expenses incurred in connection with the granting of an option may be deducted from the proceeds of disposition when calculating a taxpayer's gain.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 49 - Subsection 49(1)	writing of call option (with deemed nil ACB) is reported as having nil “cost” on T5008	99
Tax Topics - Income Tax Regulations - Regulation 230 - Subsection 230(2)	“cost” of call options closed out by writer is nil, not the cost of offsetting call option purchase/cost re short sale is the FMV of the borrowed shares	351
Tax Topics - Income Tax Act - Section 9 - Computation of Profit	cost of short sale is FMV of borrowed shares	59

15 October 2015 Internal T.I. 2014-0527041I7 F - Disposition de biens

merely facilitative expenses not deducible

In the course of a discussion not based on a repetition of the applicable facts, CRA stated:

...Avis Immobilien GMBH ... [found that] "for the purpose of" in subparagraph 40(1)(a)(i) means the immediate or initial purpose and not the eventual or final goal...[and] only the outlays and expenses incurred or made directly for the purpose of making the disposition of the property are considered in subparagraph 40(1)(a)(i), and not those which may have merely facilitated the disposition. The CRA is of the view that these principles established for the purposes of subparagraph 40(1)(a)(i) also apply to subparagraph 40(1)(b)(i).

Words and Phrases

for the purpose

15 September 2015 External T.I. 2015-0583221E5 F - Redemption by a cooperative of its own shares

no gain to cooperative corporation from redemption of its own preferred shares

Is a gain realized by a cooperative corporation, on the redemption of its own preferred shares, taxable? CRA responded:

[N]o provision of the Act contemplates a gain resulting to a cooperative corporation on the redemption by it of its own preferred shares for less than what had been received for them.

S4-F2-C1 - Deductibility of Fines and Penalties

1.22 If a fine or penalty (such as a mortgage prepayment penalty) is incurred in connection with the disposition of a capital property, the fine or penalty is taken into account under subsection 40(1) for purposes of calculating any gain or loss on that disposition.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 10 - Subsection 10(1)		31
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Undepreciated Capital Cost - A		53
Tax Topics - Income Tax Act - Section 14 - Subsection 14(5) - Cumulative Eligible Capital		47
Tax Topics - Income Tax Act - Section 14 - Subsection 14(5) - Eligible Capital Expenditure		49
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose		243
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(t)		28
Tax Topics - Income Tax Act - Section 18 - Subsection 18(9.1)		281
Tax Topics - Income Tax Act - Section 60 - Paragraph 60(o)		127
Tax Topics - Income Tax Act - Section 67.6		150

10 June 2013 STEP Round Table Q. 10, 2013 0480411C6 (Brosamler decision)

CRA considers Brosamler Estate to be confined to "a very specific fact situation," noting that the legal and probate fees in issue would have been deductible in determining capital losses on the disposition of the properties regardless of whether they could be added to the property's ACB.

CRA's decision not to appeal reflects its general policy not to appeal decisions made under the informal procedure, rather than its views on the merits of the decision.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base		75

11 January 2013 External T.I. 2012-0436771E5 - Sale of a business

sale agreement required loan prepayment penalty

The sole shareholder of Aco is required under the terms of the share sale agreement to repay, in full, at closing, a bank loan owing by Aco and an early repayment penalty. Consistently with Demers, 86 DTC 6411, both amounts are deductible in computing the shareholder's gain under s. 40(1)(a)(i) as amounts incurred for the purpose of disposing of the shares.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(9.1)	penalty paid by shareholder	85
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(e)	continued deduction where debt settlement by shareholder rather than taxpayer	24

15 November 2012 External T.I. 2012-0461291E5 F - Frais judiciaires pour clarifier une servitude

costs of preventing an expanded easement on land were not a disposition expense

A taxpayer who owned both a lakeside lot on which the taxpayer had a cottage and an adjoining lot (the "second lot") on which there was an easement (covering s specific portion thereof) permitting access to the first lot, then secured a cadastral remaking of title under which a portion of the area of the second lot was integrated with that of the first lot. However, other landowners brought an action to challenge this change on the basis that they also had had an easement over the entire second lot, as a result of which the Superior Court of Quebec confirmed that the easement was restricted to the same specific portion of the area of the second lot as noted above. When asked whether these legal expenses could be included in the adjusted cost base of the expanded first lot, CRA instead addressed the question as to whether the expenses could constitute a disposition expense under s. 40(1)(a)(i), referred to the narrow meaning accorded to the phrase "for the purpose of” in s. 40(1)(a)(i) in Avis Immobilièn, and stated:

[T]he legal costs incurred by the owner of the two lots would not be expenses incurred or made by the latter in order to realize the disposition of the cottage and the land, which includes the entire area of the first lot and XXXXXXXXXX% of that of the second lot, and therefore no part of that expense would be added to the ACB of those lots.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base	no comment on whether legal costs to avoid expanded easement were ACB addition	78

24 April 2012 Internal T.I. 2011-0400671I7 F - Honoraires professionnels

tax planning fees paid to joint counsel qualified as a disposition expense

A law firm (Advisor B) that was acting for both the purchasers and vendors (Mr. B and Corporation D) of shares of Corporation A was paid an agreed portion of its fees by Corporation D. In the course of finding that a pro rata portion of these were a disposition expense to Corporation D (with the balance giving rise to a s. 15(1) benefit to Mr. B), the Directorate stated:

[W]ith respect to professional services rendered by Advisor B on tax planning for Mr. B and Corporation D, we believe that such an expense can be considered an expense incurred to dispose of the shares. This expense could likely be recognized by Corporation D and would reduce the proceeds of disposition that Corporation D derived from the disposition of the shares.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Start-Up and Liquidation Costs	fees incurred by individual before intention to form a corp did not qualify as pre-incorporation expenses	486
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1)	meaning of “benefit”	164

4 September 2007 Internal T.I. 2007-0237791I7 F - Gain et perte sur taux de change

USD loan to parent no longer represented money on deposit, so that funds movement generated FX gain or loss

The taxpayer had a US dollar bank account into which it deposited US dollars from its sales and from which it lent US dollars to affiliates (in this case, a non-interest-bearing loan to its parent) which were repaid in US currency, which it deposited to that bank account. The Directorate rejected the taxpayer’s position that the advance to the parent came within the position in IT-95R, para. 13 that there was no realization of FX gains or losses where there was a mere change in the for in which money was held on deposit, stating:

[Such] position with respect to money on deposit does not cover situations where an investment in the form of a debt or loan, as in this situation, is acquired from an entity other than a financial institution. Consequently, the foreign currency funds would have been disposed of when the funds were used to acquire the debt obligation or loan. That disposition could result in a capital gain or loss pursuant to subsection 39(2). Furthermore … the taxpayer may realize a capital gain or loss when the debt or loan investments in its affiliates are repaid to the taxpayer since the repayment of a debt obligation is a disposition of property.

… [I]n calculating the capital gain or loss resulting from the repayment of the debt or loan, the proceeds of disposition would be converted to Canadian currency using the exchange rate at the date of repayment and the adjusted cost base would be converted to Canadian currency using the exchange rate at the date of the loan.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(g) - Subparagraph 40(2)(g)(ii)	s. 40(2)(g)(ii) extended to FX losses on non-interest-bearing loan to parent	25

7 June 2007 External T.I. 2007-0228831E5 F - Pénalité au rachat d'une obligation

bond redemption premium entered into computation of capital gain or loss of bondholder notwithstanding withholding of premium from accrued interest

When a bondholder requested an early repayment of its bonds, it was required to pay a premium that was withheld first from any accrued but unpaid interest on the bonds, and second out of the principal payable on the repayment. CRA indicated that this withholding mechanic did not reduce the interest income that was to be reported by the issuer on the T5 slip it issued, or reduce the redemption premium, which was to be deducted in computing the capital gain or loss on the disposition by the bondholder of its bonds.

29 July 2004 Internal T.I. 2003-0023761I7 F - Contrat de SWAP d'équité

swap termination payment could be deducted if it was incurred to make the disposition (the swap payment termination)

excerpted in 2009-0323991I7 F

After concluding that the payment, on the termination of an equity swap, by the taxpayer of the swap termination payment gave rise to a capital loss, the Directorate indicated that in order for that capital loss to be deductible it was necessary for the taxpayer to demonstrate that the amount paid constituted an expense made or incurred with a view to realizing a disposition of the intangible rights which were the equity swap agreement. In particular, after referring to Marren v. Ingles (1980), 54 TC 76 (HL), the Directorate stated:

In the case of an equity Swap where the rights of each party are extinguished at the end of the Swap, it is possible to apply the ratio of these UK judgments and assume that the payment of the amounts by the Taxpayer is the result of the surrender of its rights in the Swap contract.

In order to conclude that there is an allowable capital loss, the Taxpayer will have to show that the amounts paid constitute an expense incurred or made in order to realize the disposition of the intangible right that is the Swap.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Loss v. Loss	loss on equity swap entered into in monetization transaction was on capital account	163
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition	termination of equity swap contract entailed the disposition of property	67
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Futures/Forwards/Hedges	equity swap was to hedge the risk under a capital borrowing, so that loss on closing out the swap was on capital account	358

22 January 2004 External T.I. 2003-0006191E5 F - Frais et montant reçus lors de poursuite

legal fees for successfully suing broker for portfolio mismanagement would reduce the resulting capital gain on receipt of the damages

A broker was sued for his alleged mismanagement of the portfolios (held on capital account) of a holding corporation, its principal shareholder and his RRSP under a combined suit of the corporation and the shareholder (the latter also claiming for his RRSP). CCRA stated:

[T]he compensation received for the loss realized on the disposition of the investments or their reduction in value could be compensation for property damaged so that such compensation could represent proceeds of disposition of capital property. … [W]hen computing the capital gain resulting from such a disposition, the costs incurred to receive such proceeds of disposition (such as legal fees and appraisal fees that have not been reimbursed) would be expenses incurred for the purpose of making the disposition and would be deductible when computing such gain.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1)	legal fees paid by corporation in suit by it and its shareholder and his RRSP should be allocated pro rata to them even though the joint incremental costs were minimal	190
Tax Topics - Income Tax Act - Section 54 - Proceeds of Disposition - Paragraph (f)	damages received for portfolio mismanagement could be proceeds under para. (f)	87

11 December 2003 External T.I. 2003-0015975 F - calcul du gain/perte sur disposition

portion of share sales proceeds required under a Bankruptcy Act proposal to be paid to the unsecured creditors, not a disposition expense

Also released under document number 2003-00159750.

Under a Court-approved proposal to avoid the bankruptcy of a corporation, when Mr. A sold his shares of the corporation, he was required to pay a portion of the proceeds of disposition from such sale to the unsecured creditors as partial payment of their claims. In finding that any such payment likely would not be deductible under s. 40(1)(a)(i), CCRA stated:

[E]xpenses that are more of a consequence of the sale and not a condition of the sale cannot be considered in computing the gain or loss from the disposition of the capital property. Legal fees for the protection of property, the reimbursement of certain tax credits following the disposition of property, expenses relating to the possession of property such as maintenance costs, expenses relating to a cancelled sale, and legal fees relating to the recovery of proceeds of disposition or a dispute settlement relating to the proceeds of disposition are examples of expenses that normally arise from the sale of property and that, in our view, are generally not considered to be expenses made or incurred for the purpose of making the disposition of property. …

[T]he Proposal does not prevent Mr. A from selling his shares. Indeed, the Proposal is an agreement independent of the agreement to sell the Corporation’s shares and the sale of the shares must take place in order for the creditor payment clause of the Proposal to apply. Consequently, we are of the view that the expenses arising from the Proposal would not be expenses made or incurred for the purpose of effecting the sale of the Shares.

5 November 2003 Internal T.I. 2003-0037977 F - FRAIS POUR ANNULER UNE OFFRE D'ACHAT

legal fees incurred to defend a repudiation of a purchase contract might be a disposition expense (of the rights to purchase)

Also released under document number 2003-00379770.

An individual rescinded his agreement to purchase an immovable that he had initially intended to acquire for the purpose of renting it out, and incurred legal fees in order not to pay damages for such repudiation. After finding that such legal fees were capital expenditures, the Directorate stated:

There may be arguments that the legal expenses incurred to rescind the offer to purchase were expenses made or incurred by the individual to effect the disposition of property. Indeed, when the individual signed the offer to purchase, the individual may at that time have acquired property, that is, the right to purchase the immovable contained in the offer to purchase. Cancellation of the offer to purchase would constitute a disposition of that property and the expenses incurred to obtain the cancellation would be expenses incurred to effect a disposition of property. The disposition of the right to purchase the immovable would be at nil proceeds of disposition.

8 September 2003 Internal T.I. 2003-0010407 F - Gains et pertes sur change étranger

Gaynor applies in computing gain on disposition of US securities

Also released under document number 2003-00104070.

The Directorate indicated that an article, stating that the way to compute the capital gain on the disposition of shares of a US corporation was to compute a gain on the shares’ disposition using the historical exchange rate and to then compute a separate gain or loss under s. 39(2), was incorrect. Instead, under Gaynor, the shares’ ACB was determined using the historical exchange rate, and their proceeds were determined using the current exchange rate.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(2)	s. 39(2) applies to interest on US mortgage	201

9 June 2003 Internal T.I. 2003-001330

Legal fees incurred, following the disposition by the taxpayers of a property, in a dispute as to the amount of the final payment due to the taxpayers for the sale of the property did not qualify under s. 40(1)(b)(i) as being directly incurred for the purpose of making the disposition of the property.

31 January 2003 External T.I. 2002-0161555 F - VENTE D'UN IMMEUBLE LOCATIF

payment made by vendor to purchaser of building reduced its proceeds of disposition

The taxpayer signed an agreement with the tenant in which the taxpayer undertook to pay the tenant the rent paid over the past 12 months if he bought the rental building. CCRA indicated that such payment quite likely would be a reduction in the taxpayer’s proceeds of disposition of the building and could not be deducted in computing the taxpayer’s rental income since it was not paid for an income-earning purpose.

21 October 1993 Income Tax Severed Letter 9325325 - Mortgage Pay-out Penalties

loan penalty on sale

Where penalty payments are made in order to pay off a mortgage, or reduce the interest rate on a mortgage, prior to the sale of the mortgaged capital property, the payment will be considered to have been made or incurred for the purpose of making the disposition and s. 40(1)(a)(i) will be applicable. However, if a substitute property is acquired, s. 18(9.1) may have application.

26 January 1993 Memorandum (Tax Window, No. 28, p. 15, ¶2399)

Legal fees incurred by a taxpayer in a year subsequent to the sale of a capital property in order to collect the proceeds of disposition will not be deductible in calculating the gain from the original disposition or on any other basis.

91 CR - Q.29

Where a landlord makes an inducement payment outside the ordinary course of its business to facilitate the sale of a building by increasing the occupancy rate, the unamortized amount of the inducement may, depending on the facts, form part of the cost of disposition of the building.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Timing		12

18 November 1991 Memorandum (Tax Window, No. 11, p. 19, ¶1537)

S.40(1)(a)(i) may reduce the taxpayer's capital gain on the sale of shares where under the agreement the taxpayer is required to use a portion of the sale proceeds to repay a debt owed to the corporation.

89 C.M.TC - "Leasing Costs"

"payments made in contemplation of the sale of the property, i.e., to bring the property to full occupancy to enhance the sellling price ... are outlays and expenses made or incurred to dispose of the property ..."

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Expenditure v. Expense - Contract or Option Cancellation		40

Subparagraph 40(1)(a)(iii)

Cases

Pineo v. The Queen, 86 DTC 6322, [1986] 2 CTC 71 (FCTD)

The reserve was not available in respect of a demand promissory note received by the vendors as partial consideration for the sale of shares of a family farm corporation, notwithstanding that the shares were held subject to an escrow agreement until the promissory note was paid off.

The Queen v. Derbecker, 84 DTC 6549, [1984] CTC 606 (FCA)

In S.40(1)(a)(iii)(A), "the words 'due to him' look only to the taxpayer's entitlement to enforce payment and not to whether or not he has actually done so." Thus, where part of the proceeds of disposition of shares was represented by a promissory note expressed to be payable "on demand after December 31, 1976", no reserve was available to the taxpayer after 1976 notwithstanding that no demand for payment was made by him.

Words and Phrases

due

Neder v. The Queen, 82 DTC 6022, [1981] CTC 501 (FCA)

Where a taxpayer has been reassessed so as to include in his income a taxable capital gain, a S.40(1)(a)(iii) reserve is not available to the taxpayer if the Minister's assessors have not been provided with the necessary information from which they could determine the applicability or otherwise of that provision. Here, the taxpayer did not even mention the S.40 reserve in his notice of objection, and in his statement of claim "facts [were] not pleaded providing any details of the mortgage [taken back] which could possibly form the basis of a proper claim for a reserve".

Locations of other summaries		Wordcount
Tax Topics - General Concepts - Fair Market Value - Land		66

Administrative Policy

S4-F7-C1 - Amalgamations of Canadian Corporations

reserve after amalgamation

1.95 A person entitled to a reserve under paragraph 20(1)(n), subparagraph 40(1)(a)(iii) or subparagraph 44(1)(e)(iii) in respect of an amount not yet due from a predecessor corporation will not become disentitled to the reserve by virtue of the amount becoming an obligation of the new corporation on the amalgamation.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 100 - Subsection 100(2.1)	s. 100(2.1) applies to non-qualifying amalgamation	64
Tax Topics - Income Tax Act - Section 111 - Subsection 111(12)	application following amalgamation	113
Tax Topics - Income Tax Act - Section 116 - Subsection 116(1)	deemed tcp following amalgamation	167
Tax Topics - Income Tax Act - Section 13 - Subsection 13(5.1)	continuity of s. 13(5.1) on amalgamation	132
Tax Topics - Income Tax Act - Section 165 - Subsection 165(1)	Amalco can continue objection and receive refunds	157
Tax Topics - Income Tax Act - Section 169	Amalco can continue objection	103
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(n)	reserve after amalgamation	62
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Shareholder	shareholder need not hold shares	88
Tax Topics - Income Tax Act - Section 251 - Subsection 251(3.1)	deemed non-arm's length relationship on amalgamation	172
Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(b)	related party, majority and 50% group exceptions	495
Tax Topics - Income Tax Act - Section 66.7 - Subsection 66.7(7)	successoring where non-wholly owned amalgamation	109
Tax Topics - Income Tax Act - Section 69 - Subsection 69(13)	no disposition of predecessor property on general principles	113
Tax Topics - Income Tax Act - Section 7 - Subsection 7(1.4)	s. 87(5) not applicable	112
Tax Topics - Income Tax Act - Section 80.01 - Subsection 80.01(3)	non-87 amalgamation/no FX gain	165
Tax Topics - Income Tax Act - Section 84 - Subsection 84(3)	no deemed dividend to dissenter on amalgamation	87
Tax Topics - Income Tax Act - Section 85 - Subsection 85(1)	election filing by Amalco	109
Tax Topics - Income Tax Act - Section 87 - Subsection 87(1.1)	s. 87(1.1) qualifies for all s. 87 purposes	66
Tax Topics - Income Tax Act - Section 87 - Subsection 87(1.2)	successoring where non-wholly owned amalgamation	109
Tax Topics - Income Tax Act - Section 87 - Subsection 87(10)	deemed listing of temporary Amalco shares	120
Tax Topics - Income Tax Act - Section 87 - Subsection 87(11)	gain if high PUC is sub shares	55
Tax Topics - Income Tax Act - Section 87 - Subsection 87(1)	presumptive satisfaction of s. 87(1)(a)/dissent and squeeze-outs onside	297
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(a)	new corp/deemed year end coinciding or not with acquisition of control	758
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(b)	Amalco must follow predecessor's valuation method subject to truer picture doctrine	64
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(c)	reserve after amalgamation	113
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(d)	cost amount carryover	149
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(e.1)	s. 100(2.1) applies to non-qualifying amalgamation	64
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(o)	no continuity rule for non-security options	139
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(q)	pre-amalgamation services	106
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2.11)	loss-carry back to parent	169
Tax Topics - Income Tax Act - Section 87 - Subsection 87(2.1)	dovetailing with s. 88(1.1)	44
Tax Topics - Income Tax Act - Section 87 - Subsection 87(3.1)		346
Tax Topics - Income Tax Act - Section 87 - Subsection 87(3)	PUC shifts	189
Tax Topics - Income Tax Act - Section 87 - Subsection 87(4)	fractional share cash/ACB or value shift/implied non-recognition for predecessor shares	281
Tax Topics - Income Tax Act - Section 87 - Subsection 87(7)	dovetailing with s. 78 and 112(12)	191
Tax Topics - Income Tax Act - Section 87 - Subsection 87(9)	allocation of s. 87(9)(c)(ii) excess as parent chooses	230
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d)	late designation	122
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1.1)	dovetailing with s. 87(2.1)	62
Tax Topics - Income Tax Act - Section 98 - Subsection 98(5)	partnership dissolution on amalgamation	137
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2.2)	deemed non-arm's length relationship on amalgamation	467
Tax Topics - Income Tax Regulations - Regulation 1100 - Subsection 1100(2)	deemed non-arm's length relationship on amalgamation	371
Tax Topics - Income Tax Regulations - Regulation 1102 - Subsection 1102(14)	class continuity on non-arm's length amalgamation	327
Tax Topics - Income Tax Regulations - Regulation 8503 - Subsection 8503(3) - Paragraph 8503(3)(b)	pre-amalgamation services	106
Tax Topics - Income Tax Act - Section 249 - Subsection 249(3)		136
Tax Topics - Income Tax Act - Section 22 - Subsection 22(1)		179

24 February 2014 External T.I. 2013-0505391E5 F - Clause de earnout renversé

a sale price that is subject to a reverse earnout is not considered to be payable after the year (no reserve)

CRA confirmed its position in 2000-0051115 that:

Where the cost recovery method is not used and the sale price of a property is not certain at the time of the disposition because of an earnout agreement, a taxpayer may estimate the proceeds of disposition and use this amount to compute the capital gain or capital loss pursuant to subsection 40(1) of the Act. Where a taxpayer chooses this method… no amount is deductible as a reserve under subparagraph 40(1)(a)(iii) of the Act by virtue of the fact that…[a] "legally enforceable" entitlement to proceeds of disposition pursuant to the earnout agreement cannot be established until certain future events have occurred such that no amount is "payable" at the time the property is disposed of.

CRA went on to find that the same position applied to a reverse earn-out given that, due to the sale price potentially being reduced where certain conditions were not met, "the actaul proceeds of disposition are not determinable at the time of disposition of the shares ... [so that] the taxpayer will not be entitled to a capital gains reserve under subparagraph 40(1)(a)(iii)."

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(g)	no capital gains reserve on reverse earn-out for a share sale	230

7 October 2013 Internal T.I. 2013-0504081I7 F - Interaction between 55(2) and 40(1)(a)(iii)

reserve available for s. 55(2) gain on purchase for cancellation of shares where redemption proceeds payable on an earnout basis

Vendor sold blocks of shares in the capital of a corporation (the “Purchaser”) to the Purchaser, with the purchase price being payable over a following number of years based a percentage in each year of the annual consolidated after-tax profits of the Purchaser. The deemed dividend arising in the year of the repurchase under s. 84(3) was deemed by s. 55(2) to be proceeds of disposition. Was the reserve under s. 40(1)(a)(iii) available as a deduction from this capital gain?

After the Directorate confirmed that 1999-0009295 (respecting the availability of a reserve under s. 40(1)(a)(iii) to a capital gain under s. 55(2) where the capital gain arose on the receipt of a promissory note that was "considered to have been accepted as evidence of or security for the balance payable of the purchase price of the shares ... rather than] as 'absolute payment' of the debt"), and in responding affirmatively, the Directorate stated:

[T]he fact that the annual repayment of the balance of sale price was payable at the rate of XXXXXXXX% of the future consolidated annual profits did not cause the Vendor to have the right to demand payment of the balance of the sale price before the end of the taxation year of the Vendor ending on XXXXXXXXXX.

Similarly, the fact that the Purchaser could pay the balance of sale price before its due date does not give the Vendor the right to demand the immediate payment of the balance of sale price before the end of the taxation year ending on XXXXXXXXXX.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2)	s. 40(1)(a)(iii) reserve available where redemption proceeds payable on earnout basis	173
Tax Topics - General Concepts - Payment & Receipt	distinction between promissory note as conditional or absolute payment	249

16 November 2001 External T.I. 1999-0009295 - Reserve deemed capital gain

Decision summary 55-066 dated 29 November 29 1985 addressed whether a shareholder could claim a reserve under s. 40(1)(a)(iii) when its shares were redeemed in exchange for a promissory note payable in the future and, pursuant to the application of s. 55(2) to the resulting s. 84(3) deemed dividend, the shareholder was deemed to have a capital gain on the redemption. The finding there – "that if the promissory note is a conditional payment then a reserve is permitted and if the promissory note is an absolute payment then a reserve is not permitted" – still represents the Directorate's views.

17 November 1999 External T.I. 9901265 - 97(1) AND A RESERVE

"[W]here and individual transfers property to a partnership under subsection 97(2) of the Act and receives, in addition to a partnership interest as consideration, a promissory note payable over, say, five years, the agreed amount would include the note and this amount would be deemed to be the proceeds for the individual and the cost to the partnership. In such a situation, where a gain has been triggered, i.e., the agreed amount exceeds the adjusted cost base of the property transferred, the transferor will be entitled to claim a reserve under paragraph 40(1)(a) of the Act if the note taken back is received as a 'conditional payment'."

Words and Phrases

loan

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 97 - Subsection 97(2)		112

31 March 1995 External T.I. 9430115 - interest in a family farm partnership & capital gains RESERVE

A reserve may not be claimed where an individual transfers property to a partnership pursuant to s. 97(1) and receives as consideration a promissory note payable over five years. "According to the Derlago v. The Queen, 88 DTC 6290 (FCTD) case, where a provision in the Act deems property to have been disposed of for certain proceeds, the proceeds are considered to have been received by the taxpayer at the time of, or immediately after, the disposition."

93 C.R. - Q. 41

Re whether changes to the terms of a take back note or mortgage result in loss of the reserve.

10 October 1991 T.I. (Tax Window, No. 11, p. 14, ¶1515)

Where the original due date on a vendor take-back mortgage or promissory note is extended by agreement, the entitlement of the vendor to continue claiming a reserve under s. 40(1)(a)(iii) is unaffected by the extension if the note or mortgage continue to be merely evidence of the original debt.

21 August 1991 T.I. (Tax Window, No. 8, p. 6, ¶1403)

The entitlement of a vendor to claim a reserve where a promissory note was accepted only as evidence of the purchaser's obligation for the unpaid purchase price is unaffected by a renegotiation of the promissory note to extend the term or make other changes which IT-448 would consider to result in a disposition provided that the renegotiation occurs before the original due date of the note and before the end of the year in which the reserve is claimed, and the renegotiated note is accepted only as evidence of the continuing debt obligation.

14 February 1991 T.I. (Tax Window, Prelim. No. 3, p. 12, ¶1119)

A vendor take-back mortgage, whose scheduled payments of principal are substantially deferred due to the financial difficulty of the purchaser, would be considered to be a new mortgage. Where the new mortgage has been accepted as absolute payment of the original debt rather than being continuing evidence of the original debt, no reserve will be available to the vendor in the year in which the mortgage was amended. In addition, the purchaser's default might cause the debt to become due in the year of default, thereby resulting in no reserve being available in that year.

IT-236R2 "Reserves - Dispositions of Capital Property"

IT-436R "Reserves - Where Promissory Notes are Included in Disposal Proceeds"

Locations of other summaries		Wordcount
Tax Topics - General Concepts - Payment & Receipt		43

Articles

Smith, "Corporate Restructuring Issues: Public Corporations", 1990 Corporate Management Tax Conference Report, pp. 6:6-6:8: discussion of claiming of reserve by vendor under a take-over bid.

Paragraph 40(1)(b)

Administrative Policy

18 August 2014 External T.I. 2014-0540361E5 F - CDA and the deeming rules of 40(3.6) or 112(3)

ss. 112(3) and 40(3.6) stop-loss rules modify operation of s. 40(1)(b)

A corporation's capital dividend accounts will not be reduced by a loss on the redemption of shares held by it where such loss is deemed to be nil by s. 40(3.6) or 112(3), given that where s. 40(3.6) or 112(3) applies to deem its loss to be nil, it is not considered to have sustained a loss for the purpose of s. 39(1)(b). After referring to the "except as otherwise expressly provided" reference in the s. 40(1) preamble, CRA stated (TaxInterpretations translation):

Our longstanding position is…that subsection 112(3) is an express contrary indication. In accordance with subsection 112(3), the amount of a loss as [otherwise] calculated…is reduced in accordance with that subsection. The resulting loss...is considered to be the loss determined in accordance with paragraph 40(1)(b).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account	no capital loss for CDA purposes where ss. 112(3) and 40(3.6) stop-loss rules apply	128

Subsection 40(2) - Limitations

Paragraph 40(2)(a)

Subparagraph 40(2)(a)(ii)

Administrative Policy

18 May 2004 External T.I. 2004-0069691E5 F - Incorporation des professionnels

only s. 40(2)(a)(ii)(A), not (B) or (C), is potentially engaged where transferor is individual

Each of the partners, all individuals, in a partnership (a SENC) transfers their interest therein to the same corporation and each becomes a shareholder. Is the s. 40(1)(a)(iii) reserve available if the sale price is not fully received in the year of disposition? CRA responded:

[S]ince the taxpayer is an individual … only clause 40(2)(a)(ii)(A) could apply if the corporation was controlled by one of the former partners who became a shareholder of the corporation immediately after the sale.

Clause 40(2)(a)(ii)(B) is not applicable since the taxpayer is an individual and not the SENC and clause 40(2)(a)(ii)(C) is not applicable since the taxpayer is an individual and not a corporation.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 98 - Subsection 98(3) - Paragraph 98(3)(b)	WIP subject to s. 34 election is tranferred at nil	149
Tax Topics - Income Tax Act - Section 34	insolvency practice carried on by accountants does not qualify as accountancy	79
Tax Topics - Income Tax Act - Section 249.1 - Subsection 249.1(2)	s. 249.1(2) not engaged by virtue only of no income being allocated to the partner	236

Paragraph 40(2)(b)

Cases

Cassidy v. Canada, 2011 FCA 271

The taxpayer sold his six-acre rural property after it was rezoned for residential use as a result of an application made on behalf of owners of adjacent properties. He claimed a principal residence exemption on the entire gain. The Minister denied the gain on the basis of paragraph (e) of the definition of "principal residence" in s. 54 of the Act, which provides that a principal residence only includes up to a half-hectare of land contiguous with the residence unless the taxpayer can establish that a larger portion of the property was "necessary to the use and enjoyment" of the residence. The Tax Court rejected the taxpayer's appeal on the reasoning that the determination under paragraph (e) is to be made at the time the property is sold, and at that time the property had been rezoned and could be subdivided. Therefore, the entire six acres was no longer necessary to the use and enjoyment of the residence.

The Court of Appeal granted the taxpayer's appeal. Sharlow J.A. stated (at para. 35):

The error in the interpretation of paragraph 40(2)(b) proposed by the Crown, and perhaps implicit in Joyner, is that it fails to give effect to the language of paragraph 40(2)(b) that defines variable B. As mentioned above, the determination of variable B requires a determination, for each taxation year in which the taxpayer owned the property in issue, as to whether the property met the definition of "principal residence" of the taxpayer for that taxation year.

Given that the rezoning and the sale both occurred in 2003, and in light of the "plus one" component of B, the taxpayer was entitled to the principal residence exemption on the entire gain.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 54 - Principal Residence - Paragraph (e)		251

The Queen v. Joyner, 88 DTC 6459, [1988] 2 CTC 280 (FCTD)

In 1972, 14 acres of land which the taxpayer had acquired in 1965 was prohibited, by virtue of an Order in Council passed pursuant to the Environment and Land Use Act (B.C.), from being subdivided. In 1975 the taxpayer obtained the right to subdivide 7.9 of the 14 acres into residential lots, and in 1980 the taxpayer sold this 7.9 acre parcel, which included his residence.

Reed J. rejected the taxpayer's contention that his capital gain that was exempt should be calculated on the basis that his principal residence was 14 acres from 1972 to 1975 and one acre thereafter until 1980. The relevant time for determining the area of the principal residence was at the time of its disposition.

The Queen v. Yates, 83 DTC 5158, [1983] CTC 105 (FCTD), aff'd 86 DTC 6296 [1986] 2 CTC 46 (FCA)

It was held that the gain from the disposition of a portion of a principal residence was completely exempt since "it was not argued that, by its very nature a principal residence cannot be subject of a partial disposition".

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 54 - Principal Residence		60

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Real Estate	somewhat quick flip by a builder was eligible for the principal residence exemption	343

Administrative Policy

11 October 2019 APFF Roundtable Q. 2, 2019-0812611C6 F - Résiliation d'un bail - Lease cancellation

lease termination payment received by tenant was referable to complete period of holding of (annually renewed) leasehold interest

A tenant had been annually renewing a lease of a condo since the time the condo was first leased in July 2013. The condo was sold in February 2019. The new owner, who wished to dwell in the premises, was not entitled to terminate the lease until effective July 2020. In consideration for the early termination of the lease, the new owner paid $15,000 to the tenant.

2007-0254721R3 confirmed that an amount received for the termination of a lease can come within the principal residence exemption. For purposes of calculating the application of the principal residence exemption to the $15,000, should the tenant be treated as holding the residence since July 2011? CRA stated:

… [W]here the tenant of a leased property receives from the owner of that property an amount to obtain the termination of its lease … such an amount represents proceeds of disposition of part or all of the leasehold interest. …

The definition of "principal residence" in section 54 provides that a leasehold interest may be a principal residence.

In the context described, the CRA understands that there was a continuation of the residential lease each year and on the transfer of ownership between the old and the new owner. Consequently, there would have been no leasehold disposition until the lease was terminated and the date of acquisition of the leasehold interest should be the time the lease was acquired by the tenant from the former owner.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(z)	s. 20(1)(z) applies notwithstanding s. 18(1)(a) but is subject to source rule in s. 20(1) preamble	193
Tax Topics - Income Tax Act - Section 54 - Principal Residence	lease termination payment received by tenant was eligible for principal residence exemption	116
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1)	s. 20(1)-preamble source rule applied	148

5 October 2018 APFF Financial Strategies and Instruments Roundtable Q. 11, 2018-0761571C6 F - Missing info on disposition of principal residence

description of filing requirements

CRA has summarized the detailed filing requirements for reporting a principal residence disposition and making the designation. CRA also stated:

[T]he administrative practice stated on the CRA's website, allowing the reduction of the penalty for late-filing a principal residence designation, except in the most excessive cases, has been extended [from 2016-year dispositions] to dispositions that occurred in the 2017 taxation year.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 54 - Principal Residence - Paragraph (c)	CRA is only waiving penalties for late-filed principal residence dispositions for 2017 and 2016 returns	355

6 October 2017 APFF Roundtable Q. 3, 2017-0709011C6 F - Désignation d’un bien comme résidence principale

no loss of bonus year if standard designation

On page 2 of Schedule 3 of the return for the year of disposition of a principal residence, if the individual checks the box for Case 1, would this (by virtue of this effectively being a designation for all the years during which the taxpayer was owner) result in wasting the extra year under the “+1” computation? CRA stated:

Box 1 may be checked to designate [the house] as the individual’s principal residence for all years (or for all years less one year). … [T]he CRA will not require Form T2091 to be completed… .

Other locations for this summary
Tax Topics - Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(b)	no loss of bonus year if standard designation

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 54 - Principal Residence - Paragraph (c)	an individual accessing the “+1” rule on a principal residence disposition need not complete Form 2091	253

17 October 2014 Internal T.I. 2014-0546091I7 F - Indemnités lors d'une négociation de gré à gré

indemnity payment received re principal residence could be exempted under s. 40(2)(b)

An individual who purchased a residential property received indemnity payments from the vendor, pursuant to a negotiated indemnity clause, to compensate for expenses incurred in acquiring a replacement property and for the disruption of the relocation. The Directorate stated:

In this regard, the indemnity payments received could be of a capital nature if the taxpayer demonstrates that they compensated for the loss of property or for damage to property. Accordingly, the amount of the indemnity would be included in the proceeds of disposition of the property under the definition of "proceeds of disposition" in section 54. …

…[I]f the disposed-of property is the principal residence of the individual, that election is not necessary because the taxpayer can avail himself or herself of the exemption in paragraph 40(2)(b) and thereby reduce or eliminate any capital gain realized on the disposition.

S1-F3-C2 - Principal Residence

No designation before ordinary habitation

2.29 If a taxpayer acquires land in one tax year and constructs a housing unit on it in a subsequent year, the property may not be designated as the taxpayer’s principal residence for the years that are prior to the year in which the taxpayer, his or her spouse or common-law partner, former spouse or common-law partner, or child commences to ordinarily inhabit the housing unit. Such prior years (when the taxpayer owned only the vacant land or the land with a housing unit under construction) would not be included in variable B in the formula... .

Designation on part disposition

2.36 Where only a portion of a property qualifying as a taxpayer’s principal residence is disposed of (for example, the granting of an easement or the expropriation of land), the property may be designated as the taxpayer’s principal residence in order to use the principal residence exemption for the portion of the property disposed of. It is important to note that such a designation is made on the entire property (including the housing unit) that qualifies as the principal residence, and not just on the portion of the property disposed of. Accordingly, when the remainder of the property is subsequently disposed of, it too will be recognized as the taxpayer’s principal residence for the tax years for which the above-mentioned designation was made. No other property may be designated as a principal residence for any of those years by the taxpayer (or, for any of those years that are after the 1981 tax year, by the taxpayer or any of the other members of his or her family unit) as discussed in ¶2.13 - 2.14.

Locations of other summaries		Wordcount
Tax Topics - General Concepts - Ownership		259
Tax Topics - Income Tax Act - Section 54 - Principal Residence		403
Tax Topics - Income Tax Regulations - Regulation 2301		172
Tax Topics - Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(c)		410
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(b)		187
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e)		187
Tax Topics - Income Tax Act - Section 40 - Subsection 40(7)		397
Tax Topics - Income Tax Act - Section 40 - Subsection 40(4)		550
Tax Topics - Income Tax Act - Section 220 - Subsection 220(3.21) - Paragraph 220(3.21)(a)		110
Tax Topics - Income Tax Act - Section 40 - Subsection 40(6.1)	simple example of application of transitional rule	168

7 October 2016 APFF Roundtable Q. 2, 2016-0652841C6 F - Changement partiel d’usage - immeuble locatif et résidentiel

on sale of triplex, individual can claim exemption only for years in which particular units were used personally or by children

S1-F3-C2 “Principal Residence” para. 2.7 states that a housing unit includes a unit in a duplex. However, in 2011-0417471E5, CRA indicated that a duplex which has not been legally divided is a single property for s. 45(1) purposes.

A triplex with an FMV of $300K, $500K and $1,500K at the beginning of Years 1, 11 and 16 (the time of its sale), respectively, consisted: as to 50%, of Unit 1, which had direct personal use until Year 10 inclusive and thereafter was rented; as to 25%, of Unit 2, which was rented until Year 10 inclusive, and thereafter was used personally; and, as to 25%, of Unit 3 which was rented until Year 10 inclusive, and thereafter was occupied by children (paying a low rent).

How does s. 40(2)(b) apply to the disposition of the triplex at the beginning of Year 16 at a gain of $1,200K (or to any deemed disposition at the beginning of Year 11 at a gain of $200K)? After first indicating that because, after the Year 11 changes in use, the use of the single property (the triplex) was still 50% personal and 50% 3^rd-party rental, the s. 45 rules did not apply, CRA stated:

Where multiple units in a building are designated as a principal residence for different years, the taxpayer must file, within one year of the building’s sale, a Form T2091(IND) - Designation of a Property as a Principal Residence by an Individual (Other Than a Personal Trust) for each of the units in the building covered by the designation. In the described situation, the taxpayer must file two T2091 forms in the year of the sale of the property if he is designating two units.

In calculating the capital gain, an allocation of the adjusted cost base ("ACB") and of the proceeds of disposition of a building made according to the area of each unit would, in some instances, be reasonable. However, the allocation must not necessarily be based on area. It must also take into account all factors that may affect the value of any of the units in the building.

Assuming that the value of Unit 1… represented 50% of the value of the building, the proceeds of disposition of the unit would be $750,000…[and] the ACB attributable to this unit was $150,000…the taxpayer would realize a capital gain of $600,000, of which part could be designated for purposes of the principal residence exemption.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(c)	switch between which triplex units used for personal/ family rental or 3rd-party rental did not trigger change of use	249
Tax Topics - Income Tax Act - Section 54 - Principal Residence	triplex contained separate housing units	151

7 October 2016 APFF Roundtable Q. 3, 2016-0652851C6 F - Annulation d'une promesse d'achat sur une maison

damages for breach of covenant to purchase principal residence not covered

As a result of breach of a puchaser's obligation to purchase a personal residence, the individual vendor received $50,000 in damages from the defaulted purchaser. Is the $50,000 eligible for the principal residence exemption? CRA responded:

[A]s the right under the [contractual] promise is a property distinct from the personal residence, this right could not qualify as a principal residence and paragraph 40(2)(b) would not apply.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(b)	no capital loss for damages paid for breach of purchase obligation	73

10 June 2016 External T.I. 2015-0590371E5 F - Résidence principale - stationnement

designating condo parking space for a year does not exhaust exemption for the condo unit

Where a parking space was acquired as part of the purchase of a residential condo unit, the parking space can thereafter form part of the condo unit (viewed as a “housing unit” for principal residence exemption purposes) provided that the parking space facilitates the use of the housing unit (which presumably would always be the case if it is actually used by the condo owner) and it is part of the common or private area for the same building – and this is so even if the parking space as a matter of real property law is a separate from the condo unit.

Since the parking space is viewed as part of the single principal residence, CRA apparently considers that using the principal residence designation for the disposition of the parking space does not preclude the use of the principal residence exemption for the same years in question where there has been a subsequent sale of the condo unit.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 54 - Principal Residence - Paragraph (e)	a parking space can form part of a condo housing unit	241

13 March 2013 External T.I. 2012-0473291E5 F - Société de personnes - maison détruite par le feu

partner can use the principal residence exemption re gain allocated by partnership from disposition of personally-used principal residence, including following s. 44 deferral

The Taxpayer was a partner of a partnership carrying on a farming business and owning more than half a hectare of land on which there was a building (the "First House") which served as the exclusive principal residence of the Taxpayer and his father. A fire then completely destroyed the First House and the partnership used the insurance proceeds to build another building. If the partnership does not rely on the s. 44 property exchange rules, is the Taxpayer entitled to the exemption in s. 40(2)(b)? CRA responded:

[T]he Taxpayer could use paragraph 40(2)(b) to reduce or eliminate the capital gain on the disposition of the First House allocated to the Taxpayer by the partnership on the deemed disposition of the partnership, provided that it meets all the conditions in the definition of "principal residence".

If the partnership applies the s. 44 property exchange rules, could the Taxpayer use the principal residence exemption on a future disposition of the Replacement House and its land, if it continued to be used as the Taxpayer’s principal residence? CRA responded:

[T]o the extent that the partnership makes a valid election under subsection 44(1), we are of the view that the Taxpayer could use paragraph 40(2)(b) to reduce or eliminate part of the gain from a future disposition of the Replacement House and its land, which is allocated to it by the partnership, if at that future time, all the conditions of the definition of "principal residence" are also satisfied with respect to the Taxpayer.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 44 - Subsection 44(5) - Paragraph 44(5)(a.1)	replacement property generally is expected to have the same material characteristics	159
Tax Topics - Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(c)	s. 40(2)(c) unavailable re disposition of building only from fire	111

5 October 2012 Roundtable, 2012-0453961C6 F - Copropriété indivise (50-50) d'un triplex

allocation of lived-in triplex unit to total interest in triplex sold might be made on relative floor area basis if no qualitative variations

An individual held a triplex equally with his father in undivided co-ownership and also lived in one of the equally sized units as his principal residence. On a subsequent sale by them of the triplex, the individual realized a taxable capital gain of $90,000 on his portion (50% of the triplex) before taking the principal residence deduction into account. How is that deduction computed? In finding that the individual’s net taxable capital gain might be $30,000, CRA stated:

[T]he allocation does not necessarily have to be on the basis of floor area. Consideration should also be given to any factors which could have an effect on the relative value of any of the units in the building.

Assuming that the value of the three housing units is essentially the same and that the agreements between the individual and his father regarding the use of the building support such a conclusion, we could accept that the value of the individual’s undivided share of the triplex is attributable as to 2/3 for the housing unit of housing used by him as principal residence and as to 1/3 to the remainder of the triplex.

23 January 2008 External T.I. 2007-0237251E5 F - Résidence principale - Destruction d'un triplex

gain on triplex destroyed by fire then sold should be allocated between the personal use portion and rental portion based on relative building areas, but with years of use being pre-fire

A taxpayer owns a triplex that was completely destroyed in a fire. He ordinarily inhabited part of the triplex as his principal residence before the destruction, and rented the balance, and also owned a garage on the land that was not destroyed in the fire and had been used exclusively for personal use. What are the consequences of his sale of the garage and the land?

After noting that the contiguous land referred to in para. (e) of the definition of "principal residence" included the garage given that under the Civil Code “the owner of an immovable (for example, land) is the owner by accession of all constructions and works located on the immovable,” CRA indicated that the taxpayer’s gain could be reduced under s. 40(2)(b), but “only for those taxation years in which the taxpayer ordinarily inhabited the principal residence, i.e., before the triplex was destroyed by fire,” and with an allocation between the principal residence portion and the rental portion being required, likely based on the relative building areas for the two uses.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 54 - Principal Residence - Paragraph (e)	garage remaining after destruction of triplex by fire was part of the contiguous land	171

25 July 2007 External T.I. 2007-0224601E5 F - Application de l'alinéa 40(2)b)

s. 40(2)(b) deduction claimable on sale of vacant land formerly used for demolished residence, but only for years of occupation

A taxpayer acquired a residence and the subjacent land in 20X1, ordinarily inhabited it for three years, then in 20X4, demolished it without building another. Is the principal residence deduction available on the taxpayer’s sale of the vacant land in 20X6? CRA responded:

[T]he land could be designated as a principal residence for the taxation years in which the taxpayer ordinarily inhabited the residence. Consequently, if all the conditions for designating a property as a principal residence are satisfied … only the number of years the taxpayer ordinarily inhabited the residence, excluding the years the land was vacant, could be included in the description of B in the formula in paragraph 40(2)(b).

23 May 2007 External T.I. 2006-0215721E5 F - Application de l'alinéa 40(2)b)

on sale of land and second building, taxpayer can include the years of occupation of predecessor building that he demolished

A taxpayer acquired a cottage and the subjacent land in 1998, and ordinarily inhabited the cottage until 2002, when he demolished it and built a new one, which he continued to ordinarily inhabit until its sale some years later. Can he include the years of occupation of the first building in the exemption formula? CRA responded:

[T]he land could be designated as a principal residence for the taxation years in which the taxpayer ordinarily inhabited the first cottage as well as the second cottage. Consequently, if all the conditions for designating a property as a principal residence are met, we are of the view that the number of years the taxpayer ordinarily inhabited both the first cottage and the second cottage could be included in the description of B in the formula ... .

11 May 2007 External T.I. 2006-0214351E5 F - Transfert d'un droit de propriété

where duplex co-owned by husband and wife, the one unit occupied by them can be designated as a principal residence – but this changes when daughter moves into the 2nd unit

A and his wife B, had been undivided owners of a duplex since 1999, and lived in one of the units with their daughter C, while the other was rented out. In 2004, C, who contributed an initial amount when the property was purchased, moved into the rented unit. A and B now will by deed transfer to C her share of the ownership interest in the duplex based on the ratio of her down payment to the total purchase price.

After noting that IT-120R6, para. 3, “confirms that a unit in a duplex is a property that can be designated as a taxpayer's principal residence,’ CRA stated:

For each of the 2004 and subsequent years - that is, starting with the year in which C moves into the upper-floor housing unit of the duplex - it is our view that A and B will be able to designate either of the units in the duplex since they will have been ordinarily inhabited by the taxpayer, the taxpayer's spouse or common-law partner, or by a child of the taxpayer. For each taxation year prior to 2004, only the housing unit ordinarily inhabited by A and B may be designated as the principal residence. …

Similarly, we are of the view that C will be able to designate the housing unit into which she moved in 2004 as her principal residence for the years during which she ordinarily inhabited it … .

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Property	an occupied unit in a co-owned duplex can be designated as a principal residence	97

6 December 2006 External T.I. 2006-0152101E5 F - Disposition d'un domaine résiduel

principal residence exemption extends to s. 43.1(1) gain

A farmer disposes of his principal residence to a family farm corporation while retaining a life estate in it until he and his spouse die.

CRA indicated that when the farmer disposed of his remainder interest, while retaining the life estate, s. 43.1(1) applied so that he was deemed to have disposed of his life estate in the property for proceeds of disposition equal to its fair market value at that time, and was deemed by s. 43.1(1) to have reacquired the life estate immediately after that time at a cost equaling such proceeds. As a result, any gain accrued on the entire property would have been recognized at that time – but such gain would have been offset by the principal residence exemption.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 43.1 - Subsection 43.1(2) - Paragraph 43.1(2)(b)	ACB addition to residual interest in farm principal residence disposed of to family farm corporation	233

4 March 2003 External T.I. 2002-0150985 F - TRANSFERT-RESIDENCE PRINCIPALE

s. 40(2)(b) deduction available on transfer of residence to wholly-owned corporation

CCRA indicated that the principal residence deduction could be utilized on a transfer of the residence by the individual to a wholly-owned corporation, if the other conditions were met.

11 April 1995 External T.I. 9507405 - 40(2)(B)

A non-resident who disposes of his principal residence can reduce the amount of the resulting capital gain by virtue of the fact that the numerator in the formula in s. 40(2)(b)(i) will be one, even though he was never resident in Canada.

16 February 1995 Mississauga Breakfast Seminar, Q. 4

Discussion of interaction between capital gains election under s. 110.6(19) and claiming of principal residence exemption for some (but not all) the years of ownership.

88 C.R. - Q.55

The taxpayer is not required to review his use and enjoyment of the property on a year by year basis respecting the half-hectare test.

80 C.R. - Q.24

Where a taxpayer purchased a vacant lot and later constructed his principal residence on it, the denominator will include the years that he owned a vacant lot.

Paragraph 40(2)(c)

Administrative Policy

13 March 2013 External T.I. 2012-0473291E5 F - Société de personnes - maison détruite par le feu

s. 40(2)(c) unavailable re disposition of building only from fire

The Taxpayer was a partner of a partnership carrying on a farming business and owning more than half a hectare of land on which there was a building which served as the exclusive principal residence of the Taxpayer and his father. A fire then completely destroyed the First House and the partnership used the insurance proceeds to build another building. If the partnership does not rely on the s. 44 property exchange rules, is the Taxpayer entitled to the exemption in s. 40(2)(c)? CRA responded:

However, at that time, paragraph 40(2)(c) would not be applicable to the Taxpayer since the partnership did not dispose of land.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(b)	partner can use the principal residence exemption re gain allocated by partnership from disposition of personally-used principal residence, including following s. 44 deferral	263
Tax Topics - Income Tax Act - Section 44 - Subsection 44(5) - Paragraph 44(5)(a.1)	replacement property generally is expected to have the same material characteristics	159

Paragraph 40(2)(e)

Administrative Policy

12 May 1992 Memorandum 921006 (May 1993 Access Letter, p. 194, ¶C38-156)

Because there is only a deemed disposition under s. 50(1)(a) and not an actual disposition, s. 40(2)(e) does not apply to a loss arising under s. 50(1)(a).

25 March 1991 T.I. (Tax Window, No. 1, p. 7, ¶1170)

The word "person" in s. 40(2)(e) includes "persons". Accordingly, if X Co. is controlled by Mr. X and Mrs. X together, s. 40(2)(e) will apply to a sale at a capital loss by X Co. of undivided interests in property to Mr. and Mrs. X.

10 January 1990 T.I. (June 1990 Access Letter, ¶1257)

s. 40(2)(e) generally will not apply to the winding-up or liquidation of a foreign affiliate provided that under the relevant foreign corporate law, the shares of the foreign affiliate are not disposed of "to a person" as a result of the liquidation (as is the case under Canadian corporate law).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(9)		58

86 C.R. - Q.22

The phrase "was controlled" means controlled at the time of the disposition.

Paragraph 40(2)(e.1)

Administrative Policy

2014 Ruling 2013-0479701R3 - Transfer of US dollar loan

s. 40(2)(e.1) trumped s. 40(2)(g)(ii) so that US Loan ACB preserved

Current structure

Holdco2, which is wholly-owned by Mr. X (a Canadian resident), made seven non-interest-bearing demand U.S-dollar loans (collectively, the "US Loan") to another Canadian corporation ("Subco") which was wholly-owned by a Canadian corporation ("Holdco1"). Holdco1 is controlled by Mr. X through non-participating voting shares and its non-voting common shares are held by family trusts. There is an accrued FX loss to Holdco2 on US Loan.

Proposed transactions

US Loan will be amended (without being novated) to bear a commercial rate of interest.
Holdco2 will transfer the US Loan to Holdco1 in consideration for a demand Canadian-dollar interest-bearing promissory note.
Holdco1 and Subco will amalgamate so that the US Loan will be extinguished.

Rulings

The US Loan amendment will not result in its disposition nor a gain or loss under s. 39(2). The denied capital loss for Holdco2's disposition of the US Loan will be added to Holdco1's ACB for the US Loan under s. 53(1)(f.1). S. 80.01(3) will apply on the amalgamation (no forgiven amount).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(2)	amendment of non-interest bearing loan to be interest-bearing	34
Tax Topics - Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(g) - Subparagraph 40(2)(g)(ii)	s. 40(2)(e.1) trumped s. 40(2)(g)(ii) so that US Loan ACB preserved	122
Tax Topics - Income Tax Act - Section 80.01 - Subsection 80.01(3)	S. 40(2)(e.1) trumped s. 40(2)(g)(ii) so that US Loan ACB preserved	207

2012 Ruling 2011-0426051R3 - Debt Restructuring

use of s. 53(1)(f.11) bump on debt shuffle to avoid forgiveness under s. 80.01(4)

Opco is a Canadian resource company whose liabilities far exceed the value of its assets. It is the indirect subsidiary of a foreign parent and is obligated under an interest-bearing loan (Loan 2) to its immediate Canadian parent (Holdco), which also holds the shares and an interest-bearing loan (Loan 3) of Canco 2. Opco and Canco 2 are the partners of a general partnership (GP) which holds an interest-bearing loan (Loan 1) of Opco.

The proposed transactions will be implemented before a potential acquisition of control of the foreign parent (which would "grind" the adjusted cost base of Loans under s. 111(4)):

GP and Holdco will transfer Loan 1 and 2 to a newly-incorporated subsidiary (Subco) of Opco in consideration for Subco Preferred Shares
Opco will transfer its partnership interest in GP to Canco 2, so that GP will cease to exist and Canco 2 will receive Subco Preferred Shares
Canco 2 (which does not have significant tax attributes) will distribute such Subco Preferred Shares to Holdco in settlement of Loan 3 (thereby giving rise to a forgiven amount to it)
Holdco will transfer its Subco Preferred Shares to Opco in consideration for Opco Preferred Shares
Subco will be wound up into Opco under s. 88(1) (following a reduction of the stated capital of the Subco Preferred Shares)so that Loans 1 and 2 (previously owing to Subco by Opco) will be extinguished

Rulings (following ATR-66):

Ss. 40(2)(e.1) and 53(1)(f.11) will apply to the dispositions of Loans 1 and 2 to Subco
The settlement of Loans 1 and 2 on the Subco winding-up will not give rise to a forgiven amount per s. 80.01(4)
Neither s. 40(2)(e.1) nor s. 40(3.4) will apply to deny the capital loss to Holdco on the settlement of Loan 3
S. 61.3(3) will not apply to deny the application of s. 61.3(1) to Canco 2 (re inter alia the forgiven amount arising to it on the settlement of Loan 3)
S. 245(2) will not be applicable

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 80.01 - Subsection 80.01(4)	ATR-66 debt tuck-under and wind-up transactions	354

Articles

Mike J. Hegedus, "Paragraph 40(2)(e.1) Versus Subparagraph 40(2)(g)(ii): Potential Conflict?", Resource Sector Taxation (Federated Press), Vol. IX, No. 4, 2014, p.684.

2013-0479701R3 may not have dealt with conflict between s. 40(2))(g)(ii) and s. 40(2)(e.1) (pp. 686-7)

In the third and most recent ruling, the CRA opined in respect of paragraph 40(2)(e.1) but not subparagraph 40(2)(g)(ii), notwithstanding that subparagraph 40(2)(g)(ii) is specifically referenced in the title of the ruling. Although the redacted nature of the facts described in the third ruling makes it difficult to definitively conclude in this regard, it is possible that subparagraph 40(2)(g)(ii) had no reasonable prospect of applying to the situation described therein (e.g., the creditor corporation owned shares of the debtor corporation during a portion of the relevant period). Accordingly, no opinion may have been given (or for that matter, asked for) in respect, of subparagraph 40(2)(g)(ii).

S. 40(2)(e.1) should have paramountcy over s. 40(2))(g)(ii) (pp. 688-9)

Even if the CRA was of the view that subparagraph 40(2)(g)(ii) may otherwise have been applicable in Ruling 2008-0300161R3, paragraph 40(2)(e.1) should be considered to have paramountcy over subparagraph 40(2)(g)(ii). Paragraph 40(2)(e.1), in conjunction with paragraph 53(l)(f.1) or (f.11) provides balanced treatment between debtors and creditors under the debt parking rule and the stoploss rules. That is, when a debt is transferred within a related group, these provisions deny the capital loss of a former debt holder while limiting the amount of debt forgiveness that the debtor may eventually be deemed to realize via the debt parking rules in subsections 80.01(6) to 80.01(8). This occurs because the new debt holder's ACB becomes that of the old debt holder by virtue of paragraph 53(l)(f.l) or (f11). Consequently, notwithstanding the transferred debt may become on or after the transfer a "parked obligation" pursuant to paragraph 80.01 (7)(b), the "forgiven amount" that subsection 80.01(8) may deem the debtor to realize will not include the old debt holder's denied loss. Presumably, Parliament did not intend the debt parking rules to apply as a result of capital losses realized within the related group. This policy could be frustrated if subparagraph 40(2)(g)(ii) had paramountcy over paragraph 40(2)(e.1) (i.e., the new debt holder's ACB would not be equal to the old debt holder's ACB, possibly resulting in subsection 80.01(8) deeming the difference to be a forgiven amount).

Paragraph 40(2)(f)

Administrative Policy

S3-F9-C1 - Lottery Winnings, Miscellaneous Receipts, and Income (and Losses) from Crime

Lottery Schemes

1.17 Paragraph 40(2)(f) specifies that no taxable capital gain or allowable capital loss results from the disposition of a chance to win or a right to receive an amount as a prize in connection with a lottery scheme. However, subsection 52(4) states that for the purposes of computing any tax consequences after receiving a prize, a winner in a lottery scheme is deemed to have acquired the prize at a cost equal to its fair market value at the time of acquisition. …

1.18 A lottery has been defined as a scheme for distributing prizes by lot or chance among persons who have purchased a ticket or a right to the chance. If real skill or merit plays a part in determining the distribution of the prize, the scheme is not a lottery (unless it is based essentially on chance and the degree of skill is minimal).

Pool system betting

1.19 Paragraph 40(2)(f) also provides that no taxable capital gains or allowable capital losses arise from the disposition of a chance to win a bet or a right to receive an amount as winnings on a bet in connection with a pool system of betting. The nature of pool system betting is such that the only winnings are in the form of cash from the respective pool. Consequently, no additional capital gain or loss tax consequences could arise on subsequent disposition of the winnings… .

1.20 The CRA considers a pool system of betting to be a pool on any combination of two or more professional athletic contests or events. The fact that a degree of skill is involved in the selection of the outcome of the contest or event distinguishes it from a lottery scheme as described in ¶1.18.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose	repayment of embezzlement/losses from theft	524
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Timing	timing of deduction for loss from theft or embezzlement	132
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(p) - Subparagraph 20(1)(p)(i)	bad debt from fraudulent investment scheme	85
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Business		314
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition		170
Tax Topics - Income Tax Act - Section 3	non-enumerated sources included/hobby receipts, windfalls and true gifts excluded	1077
Tax Topics - Income Tax Act - Section 5 - Subsection 5(1)		220
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a)	voluntary payments	88
Tax Topics - Income Tax Act - Section 6 - Subsection 6(3) - Paragraph 6(3)(c)		142

Paragraph 40(2)(g)

Administrative Policy

7 October 2021 APFF Roundtable Q. 15, 2021-0901051C6 F - Exemption pour résidence principale

the s. 40(2)(g) formula can be prejudicial where there is delayed home construction on vacant land

An individual held vacant land from 1990 to 1999 and then occupied a new home constructed thereon as the individual’s principal residence from 2000 to the property’s sale in 2020. Even if most of the appreciation in the property occurred after 2000, the effect of the formula in s. 40(2)(b) is to apportion the gain on a straight-line basis. Is this correct and, if so, could CRA accept an alternative method of taxing the taxpayer only on the gain on the land that had accrued up to 2000?

CRA responded:

[T]he years in which land is vacant are not included in the description of B in the formula in paragraph 40(2)(b), whereas all years from the year in which the individual acquired the vacant land are included in the description of C in that same formula. It is possible, therefore, that on the subsequent disposition of the property, where the property is land that has been vacant for some of the years, that the principal residence exemption will eliminate only a portion of the gain otherwise determined.

There is no provision … that allows for a different calculation … in this situation.

28 January 2002 External T.I. 2002-0116635 F - REEE-REGLE D'ATTRIB. ET PERT NULLE

s. 40(2)(g) does not apply on a transfer to an RESP

In finding that s. 40(2)(g) does not apply where a taxpayer transfers property to an RESP, CCRA stated:

[A] capital loss that a taxpayer may realize by disposing of a property to an RESP is not deemed to be nil by the application of paragraph 40(2)(g) since such a disposition is not specifically referred to in that paragraph.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 74.3 - Subsection 74.3(1) - Paragraph 74.3(1)(a)	s. 74.1(2) does not apply where a taxpayer transfers property to an RESP	106

Subparagraph 40(2)(g)(ii)

Cases

Service v. Canada, 2005 DTC 5281, 2005 FCA 163

no shareholding in debtor

The taxpayer, who was a minority shareholder of a corporation ("Homage") engaged in a condominium development project, lent money directly to Homage as well as lending money, on a non-interest bearing basis, to a corporation ("Prescient") owned by his wife which, in turn, advanced those funds to Homage.

The Tax Court had not made a palpable and overriding error in concluding that the taxpayer had not demonstrated a nexus between the loan to Prescient and the generation of income. The loan was non-interest bearing. He was not a shareholder of Prescient and had no expectation of dividend or any right to receive any income or benefits from Prescient.

Rich v. Canada, 2003 DTC 5115, 2003 FCA 38

subordinate income-producing purpose sufficient

In finding that the taxpayer was entitled to recognize a business investment loss on an interest-bearing loan made by him to a company ("DSM") operated by his son and of which the taxpayer was a 25% owner, Rothstein JA stated (at para. 10):

The finding of the Tax Court Judge that the "predominant purpose" of the loan was to help his son necessarily implies that there was another subordinate purpose. The evidence was that the loan was to bear interest. In addition, the appellant was a shareholder of DSM entitling him to dividends. The Court is not to second-guess the business acumen of taxpayers (see Stewart v. Canada, 2002 SCC 46 at para. 55). The subordinate purpose is sufficient.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(c)		159
Tax Topics - Statutory Interpretation - Business Judgment		68
Tax Topics - General Concepts - Purpose/Intention	subordinate purpose sufficient	45

Byram v. R, 99 DTC 5117, [1999] 2 CTC 149 (FCA)

income need not flow directly

The taxpayer was able to deduct losses sustained on interest-free loans made by him to a U.S. operating company of which he was initially a direct shareholder and, subsequently, an indirect shareholder. In rejecting the Crown's submission that s. 40(2)(g)(ii) required the loan to represent a direct source of income, McDonald J.A. noted (at p. 5120) that, unlike s. 20(1)(c), the provision did not refer to the use of the debt but, rather, the purpose for which it was acquired, so that there was "no need for the income to flow directly to the taxpayer from the loan".

Cadillac Fairview Corp. v. R., 99 DTC 5121, [1999] 3 CTC 353 (FCA)

payments not made only pursuant to guarantee

he taxpayer was unable to recognize a capital loss in respect of its guarantees of bank loans made to real estate partnerships in which fifth-tier U.S. subsidiaries were invested given that, in one case, it did not make the payments in question pursuant to its guarantee of the partnership's debts (but, instead, as a contribution of capital to the relevant fifth-tier subsidiary in order for that subsidiary to repay a portion of the guaranteed debt owing by the relevant partnership) and, in the other cases, it received valuable consideration for its waiver of rights to become subrogated as a result of making payments pursuant to its guarantees, namely, the agreement of a third party to purchase the subsidiaries in question. The analysis of McDonald J.A. indicated (at p. 5126) that the taxpayer would have been considered to have disposed of subrogated debts acquired by virtue of making payments pursuant to its guarantee notwithstanding its agreement, in advance, to waive its claims of subrogation, given that "waiver 'presupposes the existence of a right to be relinquished'".

Bosa Bros. Construction Ltd. v. The Queen, 96 DTC 6193 (FCTD)

interest-free advances made only re loss protection

Interest-free advances that the taxpayer made to its U.S. subsidiary were found not to have been made to earn income (e.g., acquiring a product or ensuring a source of supply) but, rather, to cover losses and protect the guarantees of the principals of the taxpayer.

Locations of other summaries		Wordcount
Tax Topics - General Concepts - Onus		132
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21) - Depreciable Property	depreciable property where CCA had been claimed and allowed	111
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(p) - Subparagraph 20(1)(p)(ii)	interest-free advances to US sub by developer	35
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Real Estate	sale of stratified title property 1 year later on capital account/ secondary intention re ill-affordable property	210

Brown v. The Queen, 96 DTC 6091 (FCTD)

The taxpayer made interest-free loans to a real estate corporation owned by him and others that were used to fund the corporation's obligations to pay interest. It was intended that the real estate would be used to earn rent from a farm equipment corporation also owned by the taxpayer. Because "as a shareholder of the real estate company, the plaintiff was directly linked to its income-producing potential" (at p. 6094), the loans made by him to that corporation had the requisite income-producing purpose, with the result that the loss ultimately sustained by him on those loans qualified as a business investment loss.

Smith v. The Queen, 93 DTC 5351, [1993] 2 CTC 257 (FCA)

No deduction was available under s. 50(1)(a) in respect of a loan made by a corporation to an affiliate in the absence of any evidence that the recipient of the loan would be able to repay it.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2)	benefit concurred in by taxpayer was not taxable under s. 56(2) as it was taxable to the recipient	241

The Queen v. Lalonde, 84 DTC 6159 (FCTD), aff'd 89 DTC 5286 (FCA)

Two doctors made interest-free advances to a non-profit corporation which had been established to construct and operate an old-age home. Since their purpose in loaning the money was to foster an increase in the number of potential patients in their immediate area, and thereby increase their professional income, the debt was acquired for the purpose of producing business income.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Legal and other Professional Fees		68
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Loss v. Loss		76

Administrative Policy

14 June 2017 External T.I. 2016-0666411E5 - Negative returns on investments

capital loss on loan with nil interest rate may be denied by s. 40(2)(g)(ii)

A Canadian-resident taxpayer purchases a negative yield bond for $102 and will receive $100 when it matures in five years. The bond does not pay or charge period interest. If the bond is held on capital account, would the $2 loss realized on maturity be a capital loss; and if held on income account, would the $2 loss would be an income loss recognized on maturity or disposition? CRA responded:

[T]hat loss may be deemed to be nil unless it was acquired by the taxpayer for the purpose of earning income or as consideration for the disposition of capital property with whom the taxpayer was dealing at arm’s length.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Loans and Financing Charges	negative interest is deductible under s. 9 if there is a reasonable expectation of receiving (positive) interest	152
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i)	negative interest not a contra to positive interest	150

S4-F8-C1 - Business Investment Losses

connection between loan and income-producing purpose

1.46 ... Where a shareholder provides a guarantee or loan to a corporation in order to provide it capital, a clear connection will generally exist between the guarantee or the loan and the taxpayer’s potential to earn future income (from dividends) to satisfy the income-earning-purpose exception in subparagraph 40(2)(g)(ii) (see ... Byram v The Queen ...)

1.47 ... The burden of demonstrating a sufficient connection between the taxpayer’s loan to (or the taxpayer’s guarantee of the debts of) the debtor and the potential for income will be much higher in situations where the taxpayer is not a direct shareholder of the debtor. ...

1.48 For an example of a case where the taxpayer did not own shares directly in the debtor corporation but a sufficient connection was shown to exist for the exception described in ¶1.44(a) to apply, see Alessandro v The Queen, 2007 TCC 411&d1=&d2=&su=0">2007 TCC 411; 2007 DTC 1373 (TCC). For an example of a case where the connection was found to be too remote, see Service v The Queen, 2004 TCC 592&d1=&d2=&su=0">2004 TCC 592, 2004 DTC 3317, which was affirmed by the Federal Court of Appeal in Service v Canada 2005 FCA 163">2005 FCA 163, 2005 DTC 5281).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Small Business Corporation	"substantially" and "principally"	38
Tax Topics - Income Tax Act - Section 50 - Subsection 50(1)	End of year references taxpayer	343
Tax Topics - Income Tax Act - Section 50 - Subsection 50(1.1)		247
Tax Topics - Income Tax Act - Section 50 - Subsection 50(1) - Paragraph 50(1)(a)	Proactive collection efforts	157
Tax Topics - Income Tax Act - Section 39 - Subsection 39(9)	Example	182
Tax Topics - Income Tax Act - Section 164 - Subsection 164(6)	Limitation on BIL carryback	96

16 June 2016 Internal T.I. 2015-0597971I7 F - Perte réputée nulle - loss deemed nil

capital loss potentially could be recognized on a non-interest bearing loan made to a corporation in which the taxpayer had no equity/subordinate purpose sufficient

Mrs. A, F1 and F2 held, as co-owners, a building whose sole tenant was Corporation, which was owned by Mrs. A. F1 and F2 advanced sums (the “Debts”) to Corporation, under non-interest bearing demand notes, which later became bad debts after the building was sold and Corporation ceased operations. CRA, in citing Rich, first noted that

it is not necessary that an original purpose of gaining or producing income from a business or property is the predominant purpose for the loan. A subordinate purpose is sufficient.

In finding that the Debts were not acquired for the purpose of gaining or producing income from a business or property, so that the business investment loss claimed by F1 and F2 should be denied under s. 40(2)(g)(ii), CRA stated:

Contrary to the MacCallum decision, we are of the view that when F1 and F2 provided the non-interest-bearing Debts, they did not preserve a source of considerable income. This source is the building. Indeed, Mrs. A, F1 and F2 owned a building that generated rental income. This income was derived from the holding of the building… . Thus…Mrs. A, F1 and F2 always had the option of renting the property to a tenant other than Corporation and thus continuing to gain or produce rental income from that property. Consequently, there is no basis for concluding that, when F1 and F2 acquired the Debts, they had the intention of preserving and recovering a considerable source of income for themselves.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(c)	BIL potentially could be recognized on a non-interest bearing loan made to a corporation in which the taxpayer had no equity	0

2014 Ruling 2013-0479701R3 - Transfer of US dollar loan

s. 40(2)(e.1) trumped s. 40(2)(g)(ii) so that US Loan ACB preserved

Holdco2, which is wholly-owned by a Canadian resident individual, made a non-interest-bearing demand U.S-dollar loans (the "US Loan") to the Canadian subsidiary of a Canadian corporation ("Holdco1") that was controlled by the individual but mostly owned by family trusts.

Ruling that the capital loss realized by Holdco2 on its disposition of the US Loan (representing U.S.-dollar depreciation) to Holdco 1 (following the amendment of the loan to be interest-bearing) will be deemed to be nil by s. 40(2)(e.1) (so that the denied capital loss is added to Holdco1's ACB for the US Loan under s. 53(1)(f.1)) notwithstanding that s. 40(2)(g.1)(ii) also applies.

See detailed summary under s. 40(2)(e.1).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(2)	amendment of non-interest bearing loan to be interest-bearing	34
Tax Topics - Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(e.1)	s. 40(2)(e.1) trumped s. 40(2)(g)(ii) so that US Loan ACB preserved	207
Tax Topics - Income Tax Act - Section 80.01 - Subsection 80.01(3)	S. 40(2)(e.1) trumped s. 40(2)(g)(ii) so that US Loan ACB preserved	207

6 May 2014 Internal T.I. 2014-0524651I7 - Loss on conversion

non-interest-bearing loan to wholly-owned ULC

Canco indirectly controlled ULC which was the sole member (holding common membership units) of LLC. ULC also held non-interest-bearing Notes which were convertible into "Shares" (membership interests) at a specified price per share. The Notes were converted into "Preferred Shares" of LLC having a fair market value equal to the "fair market value of LLC as a whole (i.e., the remaining equity interests in LLC had no value at that time)."

After finding that s. 51 did not apply to the exchange, the Directorate noted that the fact that the Notes were non-interest-bearing did not establish that s. 40(2)(g)(ii) would deny the loss arising on the exchange, stating:

CRA has long taken the position that where a taxpayer makes a loan to a wholly-owned subsidiary at less than a reasonable rate of interest, there is still a clear nexus, for purposes of subparagraph 40(2)(g)(ii) of the Act, between the loan and the potential for future income in the form of dividends.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 51 - Subsection 51(1)	s. 51 applies where issuer had a cash redemption override	208
Tax Topics - Income Tax Act - Section 51 - Subsection 51(1)	conversion not under Note terms	185

8 July 2013 Internal T.I. 2012-0434991I7 F - Déductibilité d'une perte

per jurisprudence on guarantees, taxpayer’s reason for assuming an obligation (to protect an interest-bearing investment) must be examined

As a sideline activity to the practice of his profession, Mr. A and his partners made loans, an activity which required little time in comparison to his profession. Respecting an interest-bearing loan previously made by them to Mr. B, Mr. A and his partners paid a creditor of Mr. B the amounts owed by Mr. B for a right by way of subrogation claim against real estate held by Mr. B. Mr. A and his partners held the real estate for a short period, before selling it at a gain. However, following a subsequent bankruptcy relating to these transactions, Mr. A and his partners were ordered to pay a dollar sum. In finding that s. 40(2)(g)(ii) likely did not apply to deny recognition by the taxpayer of a capital loss, the Drectorate stated:

According to the jurisprudence on cases involving guarantees, it is possible to return to the time when a guarantee was given by the taxpayer to determine whether a debt was acquired for the purpose of earning income. The reason why the guarantee was granted must be examined. In our view, the taxpayer's situation is comparable to a payment made as a result of a guarantee. …

In Mr. A's case, it is reasonable to assume that the assumption of responsibility for the mortgage debt obligations was intended to generate income by protecting his investment. In addition, the taxpayer had no personal objective, other than earning income, for participating in the repossession of the real property.

Other locations for this summary
Tax Topics - Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(g) - Subparagraph 40(2)(g)(ii)	per jurisprudence on guarantees, taxpayer’s reason for assuming an obligation (to protect an interest-bearing investment) must be examined

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(p) - Subparagraph 20(1)(p)(ii)	ordinary business requirement looks to the presence of an organized and continuous system	251

6 December 2012 External T.I. 2012-0463431E5 F - Application of subparagraph 40(2)(g)(ii)

loss on non-interest-bearing loan to sister did not come within IT-239R2, para. 6

Creditor and Debtor were wholly-owned subsidiaries of the same parent. Creditor made interest-free loans (the "Debts") to Debtor, and subsequently sustained a total loss. After quoting IT-239R2, para. 5 and 6, CRA stated that this position "has not changed over the course of the years," and concluded that in accordance with this position the loss was denied under s. 40(2)(g)(ii) given that the Debts did not bear interest (para. 5) and the position in para. 6 did not apply as (TaxInterpretations translation):

[T]he Debts advanced by Creditor did not bear interest and it therefore did not acquire the Debts in order to produce income from a business or property. In addition, the position set out in paragraph 6 of the above Interpretation Bulletin is not applicable in this case as Creditor is not a shareholder of Debtor and has no right to receive directly or indirectly income of Debtor.

2012 Ruling 2010-0386201R3 - Tower structure capitalized by interest-free loans

unwinding of tower where LLC and ULC funded with non-interest bearing U.S. dollar loans - Byram applied

Existing structure

Canco, which is a privately-owned taxable Canadian corporation, holds a US limited liability limited partnership ("LLLP") directly and through the wholly-owned GP (Cansub). LLLP borrowed U.S. dollars under interest-bearing "Term Advances" from arm's length "Senior Lenders," and on-lent those proceeds on a non-interest bearing basis to a wholly-owned special-purpose ULC under the LLLP-ULC Loans. ULC, in turn, on-lent those U.S. dollar proceeds on a non-interest-bearing basis to its special-purpose LLC subsidiary under the ULC-LLC Loans. LLC on-lent such proceeds on an interest-bearing basis under the LLC-FA Subco Loans to a grandchild U.S. subsidiary of Canco (FA Subco). FA Subco used those proceeds to on-lend them on an interest-bearing basis to its U.S. operating subsidiary (FA Opco) under the FA Subco - FA Opco Loans or to subscribe for common shares of FA Opco. FA Opco used such share subscription proceeds or borrowed money in its U.S. operating business, as described in the unredacted ruling.

Proposed transactions

LLC will pay a U.S. dollar dividend to ULC who, in turn will pay a U.S. dollar dividend to LLLP. The ULC-LLC Loans, the LLC-FA Subco Loans, the LLLP-ULC Loan and the Term Advances (owing by LLLP) will be settled in accordance with their terms – with the accrued interest owing by FA Opco, FA Subco and LLLP being paid.

Rulings

A. The income of FA Opco from carrying on its business operations…will be regarded as "income from an active business" carried on by FA Opco in the [U.S.], within the meaning of that definition in subsection 95(1) and for the purposes of Part LIX…..

B. Income derived by FA Subco from the interest payments [on the FA Subco FA Opco Loans] will be included in computing the income from an active business of FA Subco, for its taxation year in which the payment will be received, in accordance with subclause 95(2)(a)(ii)(B)(I) and in computing the "earnings" from an active business of FA Subco and its "exempt earnings" in accordance with the definitions in Part LIX of the Regulations.

C. Income derived by LLC from the interest payments [on the LLC-FA Subco Loans] will be included in computing the income from an active business of LLC, for its taxation year in which the payment will be received, in accordance with the following provisions:

(1) subclause 95(2)(a)(ii)(B)(I) to the extent of the portion of the interest paid or payable by FA Subco in respect of the portion of the proceeds from LLC FA Subco Loans that were used by FA Subco in the relevant period to earn income from the [FA Subco FA Opco Loans], and

(2) clause 95(2)(a)(ii)(D) to the extent of the portion of the interest paid or payable by FA Subco in respect of the portion of the proceeds from LLC FA Subco Loans that were used by FA Subco in the relevant period to subscribed for additional common shares of FA Opco… provided that the FA Subco common shares continue to be Excluded Property and FA Subco and FA Opco continue to meet the conditions in that clause with respect to their residence and being subject to taxation in the Foreign Country, and such interest will be included in computing the "earnings" from an active business of LLC and its "exempt earnings" in accordance with the definitions in Part LIX….

D. Provided that the [LLC-FA Subco Loans] continue to constitute Excluded Property to LLC, paragraph 95(2)(i) will apply to deem any gain or loss realized by LLC on the settlement of [such loans] to be a gain or loss from the disposition of Excluded Property.

E. Provided that the [FA Subco FA Opco Loans], and the shares of FA Opco, continue to constitute Excluded Property to FA Subco, paragraph 95(2)(i) will apply to deem any gain or loss realized by FA Subco on the settlement of the [LLC-FA Subco Loans] to be a gain or loss from the disposition of Excluded Property.

F. The following gain or loss will be accounted for under subsection 39(1) or (2), as the case may be:

(1) provided that ULC continues to hold the [ULC-LLC Loans] as capital property, any gain or loss realized by ULC on the settlement of those loans….;

(2) any loss or gain realized by ULC on the settlement of the [LLLP-ULC Loans];

(3) provided that LLLP continues to hold the [LLLP-ULC Loans] as capital property, any gain or loss realized by LLLP on the settlement of those loans…;

(4) any loss or gain realized by LLLP on the settlement of the [Term Advances].

G. Subparagraph 40(2)(g)(ii) will not apply to deny any loss that may be realized by LLLP on the settlement of the [LLLP-ULC Loans], nor to deny any loss that may be realized by ULC on the settlement of the [ULC - LLC Loans].

Further rulings re s. 17 not applying based on s. 17(3) or 17(8)(a)(i), s. 113(1)(a) deduction to ULC, s. 20(1)(c) deduction to LLLP, and re ss. 247(2) and 245(2).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(i)	non-interest-bearing loans is made for income producing purposes: generating dividends	890

4 September 2007 Internal T.I. 2007-0237791I7 F - Gain et perte sur taux de change

s. 40(2)(g)(ii) extended to FX losses on non-interest-bearing loan to parent

CRA found that any FX loss realized on a USD loan to the taxpayer’s parent would be denied under s. 40(2)(g)(ii).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(1) - Paragraph 40(1)(a) - Subparagraph 40(1)(a)(i)	USD loan to parent no longer represented money on deposit, so that funds movement generated FX gain or loss	269

21 June 2007 Internal T.I. 2007-0239681I7 F - perte sur prêts irrécouvrables

acquisition of shares through an RRSP can establish an income-producing purpose re a non-interest loan made directly to the corp

In 1999, an individual, Mr. A, acquired shares of a small business corporation (the "Corporation") through his RRSP, and subsequently, personally made interest-free loans to the Corporation. In December 2005, the RRSP sold the shares for $1, and the corporation was insolvent. The Directorate stated:

Mr. A appears to have advanced the funds to the Corporation for the purpose of providing capital to the Corporation and he probably expected to realize income from the Corporation through his RRSP which is property.

Given … Byram, we do not believe that Mr. A's loss should be deemed to be nil solely because the Corporation's shares were acquired by the RRSP and not personally by Mr. A.

9 June 2005 Internal T.I. 2005-0122511I7 F - Créance irrécouvrable dans une OSBL

a debt obligation bearing a reasonable rate of interest satisfies s. 40(2)(g)(ii)

Before finding that a loss on an interest-bearing loan made by a director of a not-for-profit organization to the NPO that became a bad debt when the NPO became bankrupt or insolvent gave rise to a business investment loss if, as stated by the TSO, the NPO qualified as a small business corporation, the Directorate stated:

For the purposes of paragraph 40(2)(g)(ii), a debt obligation bearing a reasonable rate of interest is a debt obligation acquired for the purpose of earning income.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(c) - Subparagraph 39(1)(c)(iv)	loss on interest-bearing loan made by a director to an NPO qualified as BIL if NPO qualified as SBC	108

22 January 2004 Internal T.I. 2003-0047561I7 F - Effet de la délégation puis de la subrogation

s. 40(2)(g)(ii) did not apply to a debt claim acquired by subrogation against a defaulted debtor since the claim was interest-bearing

The taxpayer sold an immovable to a purchaser who assumed a mortgage on the property. The purchaser subsequently defaulted, and the mortgagee sold the property pursuant to a court order, and the mortgagee also obtained a court order ordering the taxpayer to pay the unpaid balance, with the mortgagee also agreeing that, upon such payment, the taxpayer would be subrogated to the mortgagee’s claim against the purchaser for such balance. The purchaser filed for bankruptcy and the taxpayer then obtained a payment from the trustee in bankruptcy in partial satisfaction of its subrogated claim against the estate of the bankrupt.

CCRA found that the taxpayer could not claim a loss pursuant to s. 42 or on the basis of an actual disposition when it made the court-ordered payment to the mortgagee, “since the taxpayer did not pay this amount under a warranty but in payment of the mortgage for which the taxpayer remained the debtor” and that the payment “did not represent a disposition of property.” However, the ultimate loss could be recognized in the taxation year of the payment by the trustee in bankruptcy. In this regard, the Directorate stated:

[T]he provisions of paragraph 40(2)(g)(ii), that deem a loss on the disposition of certain debt obligations to be nil, do not apply since the … debt obligation was interest-bearing, as the taxpayer was subrogated by the financial institution as to the interest-bearing mortgage

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 42	payment under covenant of vendor regarding mortgage assumed by purchaser, who defaulted on its assumed obligation, did not generate a s. 42 loss	168

14 January 2004 External T.I. 2003-003875

follows Byram

CRA has accepted the decision in Byram so that, in its 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 s. 40(2)(g)(ii). Accordingly, the provision would not deny a capital loss to a taxpayer in respect of a non-interest bearing loan to a non-resident wholly-owned subsidiary.

18 December 2003 Internal T.I. 2003-0044007 F - OPTION D'ACHAT D'ACTIONS RACHETEES

unpaid and defaulted balance of stock option surrender consideration was not property used in a property or business source

Also released under document number 2003-00440070.

The taxpayer surrendered his stock options to his arm’s-length employer for consideration that was payable partly up front and partly in instalments that were conditional on the employee’s continued employment for a specified period (a condition which he satisfied) and came due in years subsequent to that of the surrender. In finding that the taxpayer’s loss on the unpaid instalments could not be recognized as a capital loss, the Directorate stated:

Although an election under section 50 could be made because it can be shown that the debt is uncollectible at the end of the particular year, the loss on such a debt is deemed to be nil pursuant to subparagraph 40(2)(g)(ii) unless the taxpayer acquired the debt for the purpose of gaining or producing income from a business or property, or as consideration for the disposition of capital property to a person with whom the taxpayer was dealing at arm's length.

Since the debt was non-interest bearing and did not provide for any other form of return, and the debt arose from the disposition of options received in the course of an office or employment, the loss in question will not be considered to be a loss eligible for any deduction based on the debt having been acquired for the purpose of gaining or producing income from a business or property.

Furthermore, as “employee stock options subject to section 7 do not qualify as capital property where the gain on their disposition is treated as employment income and not as a capital gain,” the loss did not qualify as being from “the disposition of capital property” to an arm’-length person.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 7 - Subsection 7(1) - Paragraph 7(1)(b)	full option surrender consideration included under s. 7(1)(b) even though a portion thereof never paid	170
Tax Topics - Income Tax Act - Section 54 - Capital Property	employee stock option surrender proceeds were not from the disposition of capital property	84

24 September 2003 Internal T.I. 2003-0184097 F - perte au titre de placement

Byram accepted: NIB loan can be made with a view to dividends

Also released under document number 2003-01840970.

CCRA accepted the correctness of Byram in finding that, since a shareholder made a non-interest bearing loan the a corporation with the expectation of realizing dividend income, the debt satisfied the income-producing purpose test under 40(2)(g)(ii).

21 November 2001 Internal T.I. 2001-0094527 F - PERTE REPUTEE NULLE-BRYAN

Byram now followed re loss on non-interest-bearing shareholder loan to corporation

In finding that a non-interest bearing loan made by the individual shareholder likely satisfied s. 40(2)(g)(ii) in light of Byram, the Directorate stated that “the shareholder appears to have advanced the funds to the corporation for the purpose of providing capital and probably expected to realize dividend income.”

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 50 - Subsection 50(1) - Paragraph 50(1)(a)	no partial bad debt recognition under s. 50(1)(a)	64

17 December 1996 Internal T.I. 9634547 - DISPOSITION OF EMPLOYMENT BONUS NOTES

A loss realized by an employee from the disposition of notes received by him from his employer in lieu of a cash bonus would not be subject to the stop-loss rule given that the notes bore interest.

Halifax Round Table, February 1994, Q. 1

A loss realized by a shareholder of a small business corporation on the sale of a non-interest bearing loan to an arm's length party may be deductible when the shares of the corporation are also sold, but not where the shares are not sold (or where there is no sale of either the shares or the loan, and the shareholder wishes to recognize the loss under s. 50(1)(a)).

23 December 1993 Income Tax Severed Letter 9317905 - Allowable Business Investment Loss

Discussion of when a shareholder can recognize a capital loss on a non-interest bearing loan owing to her by the corporation where the shareholder sells her shares of the corporation to an arm's length purchaser.

91 C.R. - Q.35

Where a holding company is required to have an interest-free debt owing to it by Opco settled for an amount less than its ACB as a condition to the sale of the shares of Opco to an arm's length purchaser, RC will not treat the loss resulting from the disposition as being nil provided the conditions in paragraphs 6 and 10 of IT-239R2 are met.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(1) - Paragraph 39(1)(c)		26

21 August 1991 T.I. (Tax Window, No. 8, p. 22, ¶1397)

A director's loss under s. 227.1 will be non-deductible by virtue of s. 40(2)(g).

12 September 1990 T.I. (Tax Window, Prelim. No. 1, p. 10, ¶1016)

Where A transferred a non-interest-bearing debt at a loss to its affiliate, B, and B then sold the debt in an arm's length transaction, the loss of B would be denied by s. 40(2)(g)(ii). RC stated that "'we are unable to envision a situation where the purchase of a non-interest-bearing debt by a person could be for the purpose of gaining or producing income'".

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(f.1)		50

15 September 89 Memorandum (February 1990 Access Letter, ¶1105)

The position in IT-445 respecting interest-free loans is still supportable. The Business Art case, in which a Canadian corporation was allowed to deduct capital losses on interest-free advances made to a British corporation, should not be followed.

1 September 89 T.I. (February 1990 Access Letter, ¶1106)

Where a wife guaranteed for no consideration a bank loan to her husband's corporation in which she was not a shareholder, she was unable to claim a capital loss because the guarantee was given for no consideration and she was not a shareholder.

22 Aug. 89 T.I. (Jan. 90 Access Letter, ¶1078)

In light of the Canada Safeway and DWS cases, RC does not accept that when a shareholder incurs a debt to his corporation he does so to indirectly derive income from business or property through the preservation of his shares, and RC therefore is appealing the Fritz case.

81 C.R. - Q.4

Guidelines in the case of a guarantee granted a lender by a sole shareholder of the borrower for no compensation.

IT-239R2 "Deductibility of Capital Losses from Guaranteeing Loans for Inadequate Consideration and from Loaning Funds at less than a Reasonable Rate of Interest in Non-arm's Length Circumstances"

6. Where a taxpayer has loaned money at less than a reasonable rate of interest to a Canadian corporation of which he is a shareholder, or to its Canadian subsidiary, or has guaranteed the debts of such a corporation for inadequate consideration, any subsequent loss arising to him from the inability of the corporation to discharge its obligations to him, or from having to honour the guarantee, may be a deductible capital loss to him despite the absence of a reasonable rate of interest or adequate consideration. Generally it is the Department's practice to allow a loss on such a loan or guarantee and not treat it as being nil by virtue of subparagraph 40(2)(g)(ii) if the following conditions are satisfied:

(a) the corporation to whom the loan was made or whose debts were guaranteed used the borrowed funds in order to produce income from business or property, or used the borrowed funds to lend money at less than a reasonable rate of interest to its Canadian subsidiary in turn to be used to produce income from business or property,

(b) the corporation has made every effort to borrow the necessary funds through the usual commercial money markets but cannot obtain financing without the guarantee of the shareholder at interest rates at which the shareholder could borrow,

(c) the corporation has ceased permanently to carry on its business, and

(d) the loan from the shareholder to the corporation at less than a reasonable rate of interest (or at no interest) does not result in any undue tax advantage to either the shareholder or the corporation.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 246 - Subsection 246(1)		46

IT-390 "Unit Trusts - Cost of Rights and Adjustments to Cost Base"

A capital loss arising when additional units are issued in settlement of a unit holder's right to receive a distribution of a capital gain of the unit trust, is deemed to be nil.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 52 - Subsection 52(6)		317

Articles

Reid, "Capital and Non-Capital Losses", 1990 Conference Report, c. 16

Discussion of deductibility of losses arising from amounts paid under guarantees.

Subparagraph 40(2)(g)(iii)

Administrative Policy

7 October 2016 APFF Financial Strategies and Instruments Roundtable Q. 4, 2016-0651791C6 F - Choix 45(2) et (3) - immeuble à logements

capital loss recognition on land underlying duplex used 40% personally

At civil law, land and building are a single property (although this rule is overridden for CCA/recapture purposes). Consequently, if a duplex property is used more than 50% for rental use, so that it is not personal-use property, a capital loss realized on a sale of the property and relating to all of the non-depreciable component can be recognized (subject to s. 13(21.1)) as a capital loss notwithstanding its partial personal use.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 45 - Subsection 45(3)	invalidity of s. 45(3) elections on duplex units applied only for changes of use after February 21, 2012	185
Tax Topics - Income Tax Act - Section 54 - Personal-Use Property	land underlying duplex used 40% personally is not personal-use property	233
Tax Topics - Income Tax Regulations - Regulation 1102 - Regulation 1102(2)	Reg. 1102(2) deems building to be separate from land and does not bifurcate the land	176

Subparagraph 40(2)(g)(iv)

Clause 40(2)(g)(iv)(B)

Administrative Policy

7 May 2003 External T.I. 2003-0182755 F - Superficial Loss on Shares

sale by individual to her husband followed by immediate sale by him to her RRSP, circumvented s. 40(2)(g)(iv)(B)

Also released under document number 2003-01827550.

The taxpayer’s spouse realized a capital loss on transferring her shares, with an accrued capital loss, for cash proceeds equaling their FMV, which was not denied pursuant to s. 40(2)(g)(i) because such shares were immediately disposed of by the taxpayer to the spouse's RRSP (with CRA noting that generally an individual is not affiliated with a trust under s. 251.1(1).) Furthermore, such disposition by the taxpayer of the shares to the spousal RRSP did not result in a capital gain or loss, so that s. 40(2)(g)(iv)(B) was not relevant.

However, the spouse’s capital loss might be denied under GAAR “since it appears that the series of transactions would circumvent the application of clause 40(2)(g)(iv)(B).”

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 54 - Superficial Loss	transactions for sale by individual to her husband circumvented s. 40(2)(g)(i) through the sale by him back to her RRSP, and could be GAARable	274

Subsection 40(3) - Deemed gain where amounts to be deducted from adjusted cost base exceed cost plus amounts to be added to adjusted cost base

Administrative Policy

30 October 2014 External T.I. 2013-0488881E5 - Upstream Loan

notional s. 40(3) gain does not generate surplus

Where Canco receives a s. 90(9)(a) notional dividend as a result of a loan from a 2^nd tier FA (FA2), it will not be credited for s. 90(9) purposes with surplus which would have arisen to the 1^st-tier FA (FA2) if, in fact there had been a dividend paid from FA2 to FA1. See detailed summary of Scenario 5 under s. 90(9).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(28)	no double inclusion following FA creditor wind-up	60
Tax Topics - Income Tax Act - Section 90 - Subsection 90(6)	no double inclusion following FA creditor wind-up or for 2nd loan in series	121
Tax Topics - Income Tax Act - Section 90 - Subsection 90(9)	notional election and double taxation issues	1332
Tax Topics - Income Tax Regulations - Regulation 5901 - Subsection 5901(1.1)	notional Reg. 5901(1.1) election	30
Tax Topics - Income Tax Regulations - Regulation 5901 - Subsection 5901(2) - Paragraph 5901(2)(a)	90-day rule unavailable	28
Tax Topics - Income Tax Regulations - Regulation 5901 - Subsection 5901(2) - Paragraph 5901(2)(b)	notional Reg. 5901(2)(b) election	31
Tax Topics - Income Tax Regulations - Regulation 5907 - Subsection 5907(1) - Underlying Foreign Tax	notional UFT disproportionate election	37

8 October 2010 Roundtable, 2010-0373461C6 F - Retrait d'une société de personnes

negative ACB realized pro rata as units are redeemed

Where a general partner whose units have a negative ACB has his units redeemed equally over the course of five years, 20% of the negative ACB will be included in computing his capital gain from the disposition of 20% of his units in the first year of redemption pursuant to s. 100(2).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 100 - Subsection 100(2)	negative ACB realized pro rata under s. 100(2) as portion of the units are redeemed each year	201
Tax Topics - Income Tax Act - Section 43 - Subsection 43(1)	all the partner’s units are a single property	81
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Property	partnership unit is not separate property from other units	57

Rulings Directorate Discussion and Position Paper on Motion Picture Films and Video Tapes as Tax Shelters, Version 29/3/93 930501 (C.T.O. "Motion Picture Films - C.C.A.")

Discussion in Appendix of techniques for postponement of realization of negative ACB by investors in film limited partnership. RC also states that a negative ACB "is acceptable provided that the partnership in not artificially kept alive in order to prevent crystallization of the negative ACB into a capital gain ... or provided negative ACB has not resulted from a disguise sale of a partnership interest as in Richard K.G. Stursberg (91 DTC 5607)".

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 103 - Subsection 103(1)		119
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4)		51
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4)		69
Tax Topics - Income Tax Act - Section 43 - Subsection 43(1)		86
Tax Topics - Income Tax Act - Section 9 - Timing		164
Tax Topics - Income Tax Act - Section 96 - Subsection 96(2.2) - Paragraph 96(2.2)(d)		43

Articles

Melanie Huynh, Eric Lockwood, "Foreign Affiliates and Adjusted Cost Base", 2007 Canadian Tax Journal, Issue No. 1

Effect of negative ACB gains on CFA shares that are excluded property

Canco, wholly-owns CFA 1, which wholly-owns CFA 2. A Canadian dollar (but not calculating currency) computation indicates that a s. 40(3) gain occurred in the past on a dividend paid by CFA 2 which, if the shares of CFA 2 were not excluded property at that time, would be FAPI to CFA 1, but would be a "phantom gain," if they were. However, if the shares of CFA 2 subsequently ceased to be excluded property, the phantom gain would be relevant for determining the ACB and hence the amount of gain or loss on a future disposition. (pp. 144-145)
Normally, a capital gain on a property under s. 40(3) results in its ACB being reset to nil, which presumably, would be the case even for a phantom gain. However, the Act does not directly address the issue as to whether the "negative" ACB would instead continue until offset by future capital contributions. (p. 145)

Subsection 40(3.1) - Deemed gain for certain partners

Administrative Policy

29 November 2022 CTF Roundtable Q. 1, 2022-0949781C6 - Loans Made by Limited Partnerships to Limited Partners

purpose of policy re annual reversing loans by an LP to its limited partners is only to address timing mismatches

2016-0637341E5 stated that s. 53(2)(c)(v) is very broad and could in theory (depending on all relevant facts) apply to the amount of the loans made by a limited partnership to a limited partner where loans are made by the partnership to a limited partner, in lieu of the payment of distributions of the limited partner’s share of the partnership profits. What are the CRA’s current views on situations where loans are received by a limited partner from a limited partnership that have a purpose of avoiding a gain that could be realized under subsection 40(3.1)?

CRA noted that it had also answered this question at the 2022 APFF Roundtable, Q.5. A summary of that position (with editorial additions by it in bold) is provided below:

CRA generally will not attempt to include a loan received by the partner from a limited partnership under s. 53(2)(c)(v) if five conditions are met:

The loan should not be made in satisfaction of a return of contributions of capital of the partner. (This position is meant to permit only the distribution of profits.)
The aggregate of the loans received by the partner in respect of the partnership’s fiscal period should not materially exceed the total of:
1. the partner’s share of the partnership-adjusted income for the period; and
2. the limited partner’s ACB.
Shortly after the end of the fiscal period, the limited partnership should make a distribution payable to the partner which is equal to amount of the loans received by the partner in the fiscal period, and the distribution should be used to fully settle the loans – in other words, CRA needs to see a set-off of the loans and the distributions.
The loan should be made primarily for the purpose of avoiding a deemed gain under s. 40(3.1) that would be realized by the partner at the end of the partnership’s fiscal period, and that would solely be due to the timing difference between the addition in, and deduction from, the calculation of the ACB of the partnership interest related to the partner’s share of the partnership-adjusted income, and the distributions to the limited partner in respect of the period on their side. (This administrative position enables the partner to enjoy the income being earned during the year because of the technical mismatch between the timing of the income inclusion and the distributions.)
The partnership interest cannot be a tax shelter, and the transactions involving the partnership cannot be part of a series of transactions to which GAAR applies.

If any of these conditions are not met, CRA may consider the application of 53(2)(c)(v) or GAAR to the whole amount received as a loan.

7 October 2022 APFF Roundtable Q. 5, 2022-0947611C6 F - Limited Partnership and Loans

loans made only to avoid s. 40(3.1) gains due to income gains not being added to ACB until next year, may be acceptable

2016-0637341E5 indicated that s. 53(2)(c)(v) potentially could apply respecting the amount of loans made by a partnership to a limited partner. What is the current position in situations where loans from a limited partnership are received by a limited partner in order to avoid a gain under s. 40(3.1)? CRA responded:

The CRA will generally not seek to include a loan received (as, on account or in lieu of payment of, or in satisfaction of a distribution of the taxpayer's share of the profits or partnership capital) by a limited partner of a partnership under subparagraph 53(2)(c)(v) if all of the following conditions are satisfied:

1. The loan is not made on account of or in full or partial payment of a withdrawal of a limited partner's capital contribution.

2. The total amount of all loans received by the limited partner in respect of a fiscal period of the partnership does not exceed the total of the limited partner's "share of the adjusted net income of the partnership"⁷ for the fiscal year and the adjusted cost base ("ACB") of the limited partner's interest at the end of the fiscal year (the ACB being determined before the application of subparagraph 53(2)(c)(v) in respect of the loans); or, if there is an excess amount, it is not material in the circumstances.

3. Shortly after the end of the fiscal period, the partnership declares a distribution payable to the limited partner in an amount equal to the total amount of the loans received by the limited partner during the fiscal period and the distribution is used to settle the loans to the limited partner (in cash or by way of set-off).

4. The loan (made in lieu of the cash payment of the distribution) is made primarily for the purpose of avoiding a deemed gain to the limited partner pursuant to subsection 40(3.1) that would be realized at the end of the fiscal period of the partnership caused solely by the difference between the time of the addition and the time of the deduction of the following respective amounts in computing the ACB of the limited partner's interest in the partnership:

(a) the limited partner's share of the adjusted net income of the partnership for the fiscal period, and

(b) the distributions to the limited partner for the fiscal period pursuant to subparagraph 53(2)(c)(v), where no portion of such distributions were made in the form of loans.

5. The partnership interest is not a tax shelter⁸, and the partnership or transactions involving or related to the partnership are not part of a larger series of transactions that includes an avoidance transaction (as defined in subsection 245(3)) to which subsection 245(2) should apply.

Where one of the above conditions is not satisfied, the CRA could consider the full amount received as a loan to be received "as, on account or in lieu of” a distribution of the limited partner's share of the profits of the partnership or the partnership capital for purposes of applying subparagraph 53(2)(c)(v), but without any further reduction in the ACB of the interest pursuant to that subparagraph in respect of the distribution made by the partnership to repay the loan; or the CRA may consider applying the general anti-avoidance rule ("GAAR").

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 53 - Subsection 53(2) - Paragraph 53(2)(c) - Subparagraph 53(2)(c)(v)	guarded acceptance of distributions of LP profits as loans, followed by set-off against draws in January	377

27 June 2016 External T.I. 2016-0637341E5 F - Partnerships - Negative ACB

loans by LP to partner potentially gave rise to negative ACB gain

Rather than making current distributions of its cash flow to a limited partner, those sums are lent by the LP to the limited partner – then at the beginning of the following year the LP effects a distribution of the applicable share of the previous year’s profits to the limited partner by issuing a demand note to it and pays that note by way of set-off against the loans owing by the limited partner.

CRA stated that under the Quebec civil law the loans by the LP to the limited partner might not be valid, in which case their amount would give rise to an immediate reduction under s. 53(2)(c)(v), so as to give rise to an immediate gain under s. 40(3.1). Furthermore, the same result could obtain based on the Courts having

given a very wide scope to the terms "on account of" and "in lieu of"…, which are also used in subparagraph 53(2)(c)(v).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 53 - Subsection 53(2) - Paragraph 53(2)(c) - Subparagraph 53(2)(c)(v)	loan advances to a limited partner may give rise to immediate s. 53(2)(c)(v) grind	261
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.13)	retention of partnership profits not a contribution	150
Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(e) - Subparagraph 53(1)(e)(iv)	assumption of loan can be contribution, but not retained profits	177

18 June 2014 External T.I. 2011-0417491E5 - Non-resident's partnership interest

negative ACB gain not taxable to non-resident

[2011-0421481E5 is similar]

A non-resident corporation (NRco) is deemed under s. 40(3.1)(a) to realize a gain in respect of its limited partnership interest in P, which is taxable Canadian property. Would NRco be considered to have thereby disposed of taxable Canadian property? CRA stated:

[P]aragraph 40(3.1)(b) deems NRco to have disposed of the interest in P only for the purpose of section 110.6…[and] NRCo would not be considered to have disposed of its interest in P for any other purpose including for the purpose of paragraph 2(3)(c) or clause 150(1)(a)(i)(D)… . However, NRco would be considered to have a taxable capital gain for the purposes of clause 150(1)(a)(i)(C) of the Act and would therefore be required to file an income tax return in Canada. …[N]on-taxation of the Deemed Gain in the above circumstances is contrary to policy and we have therefore brought the issue to the attention of the Department of Finance.

15 December 2010 External T.I. 2009-0349911E5 F - Calcul du PBR d'une participation dans une SEC

withdrawal equalling capital gain realized in year by LP triggered negative ACB gain to limited partner

In February 2008, a limited partnership (“LP”) realized a capital gain, of which $100,000 was allocable to Limited Partner A, whose interest had an adjusted cost base at the beginning of the (calendar) 2008 fiscal period of LP. $100,000 was withdrawn by Limited Partner A in March 2008. In finding that Limited Partner A realized a negative ACB gain, CRA stated:

[T]he ACB of Limited Partner A's interest as at December 31, 2008 is negative in the amount of $90,000 after taking into account the withdrawal of $100,000 made in March 2008. As a result, Limited Partner A would have a deemed capital gain of $90,000, which is equal to Limited Partner A's negative ACB at the end of the partnership's fiscal period. In this case, the ACB of the interest is reduced to nil as of December 31, 2008. In addition, in computing the ACB of the Limited Partner's interest in the LP as at January 1, 2009, it is necessary to take into account the income of the LP for its fiscal period ended December 31, 2008 that was distributed to Limited Partner A. Based on the foregoing and assuming that there are no other items adjusting the ACB of Limited Partner A's interest, Limited Partner A's ACB as of January 1, 2009 would be $100,000.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(e) - Subparagraph 53(1)(e)(i)	no ACB bump for gains realized in the year until Day 1 of following year	98

Subsection 40(3.12) - Deemed loss for certain partners

Administrative Policy

2021 Ruling 2021-0895071R3 F - Partnership Reorganization

no s. 40(3.12) ruling given re loss on fund LP wind-up

A limited partnership (Carry LP), that was owned directly or indirectly by two unrelated individuals (A and B) and their families, held a carry with an accrued gain in a Canadian fund (Fund LP), whose general partner was owned by A and B, and one of whose limited partners was a CCPC owned by A. Fund LP held a significant stake in a listed Canadian public corporation (Pubco) consisting of “Rollover Shares” (with accrued gains) and “Non-Rollover Shares” (which may have had accrued losses), as well as other investments (the “Other Investments”), and had no debt. In order to inter alia effectively convert the limited partnership interests in Fund LP to a single class of plain vanilla units:

Fund LP sells enough of its shares on the stock exchanges in order to generate proceeds sufficient to distribute the amount of the contributed capital and preferred return thereon to all the non-carry partners, such that Carry LP and the other limited partners will now be entitled to share in future distributions on a pro rata basis.
Fund LP transfers its Rollover Shares and Other Investments on a s. 97(2) rollover basis to a new subsidiary LP (New LP) in consideration for the plain-vanilla units.
Within 30 days of 2 above, Fund LP is wound up such that its partners receive undivided interests in all its property (essentially, the Non-Rollover Shares and the units of New LP), with a joint s. 98(3) election filed.
Pursuant to a partition agreement, each of the former partners receives a pro rata fraction of each Non-Rollover Share and each New LP Unit.
The other former partners sell their respective fractions of Non-Rollover Shares to Carry LP for cash consideration equaling the FMV thereof.

The CRA summary discloses that the requested rulings included that an s. 40(3.12) election could be made with respect to the last fiscal period of Fund LP where the provisions of s. 98(1)(a) applied, as to which CRA noted:

Unable to rule. The question does not relate to a proposed transaction and will be further analysed in XXXXXXXXXX, if necessary. May result in timing issues with respect to adjusted cost base adjustments to the partnership interest.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 98 - Subsection 98(3)	conversion of a carry to a straight-up interest	476
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.3)	refusal to rule where shares received on LP s. 98(3) wind-up immediately sold to Carry LP owned by owners of former general partner	345

3 July 2012 External T.I. 2012-0449701E5 - Subsection 40(3.12) and tiered ptnshps

As s. 40(3.12) is limited to corporations, individuals (other than trusts) and testamentary trusts:

[a]n election under subsection 40(3.12)...cannot be made by a partnership that is itself a member of a partnership. In this regard, it is our view that there is no legislative authority to look through the top partnership and treat the partners of that partnership as partners of the bottom partnership."

Articles

Joint Committee, "Response to Green case", 19 January 2018 Joint Committee Submission to Finance respecting the Green case

Desirability of extending relief from negative ACB gains

Although s. 40(3.12) is intended to address the problem of negative ACB arising from interim distributions before ACB is increased by year-end income, it is not an ideal solution. It is suggested that the s. 40(3.111) relief accorded to professional partnerships be extended.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 111 - Subsection 111(1) - Paragraph 111(1)(e)		186

Subsection 40(3.13)

Administrative Policy

27 June 2016 External T.I. 2016-0637341E5 F - Partnerships - Negative ACB

retention of partnership profits not a contribution

[T]he profits of a limited partnership in a situation such as that described would not be considered as contributions of capital for the purposes of subsection 40(3.13).

Subsection 40(3.13) would not generally be applicable in this situation given that there is no contribution of capital.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 53 - Subsection 53(2) - Paragraph 53(2)(c) - Subparagraph 53(2)(c)(v)	loan advances to a limited partner may give rise to immediate s. 53(2)(c)(v) grind	261
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.1)	loans by LP to partner potentially gave rise to negative ACB gain	168
Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(e) - Subparagraph 53(1)(e)(iv)	assumption of loan can be contribution, but not retained profits	177

Subsection 40(3.14)

Paragraph 40(3.14)(a)

Administrative Policy

11 October 2013 APFF Roundtable, 2013-0495861C6 F - Question 20 - APFF Round Table

not a limited partner if unlimited liability to third parties

In the course of a general discussion, CRA stated:

In order not to qualify as a limited partner pursuant to paragraph 40(3.14)(a), it is understood that the partner's liability must be unlimited vis-à-vis third parties and that the partner must actually be liable for the obligations of the partnership within the meaning of the law governing the partnership agreement, in this case the C.C.Q.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Specified Member	specified member status determined re involvement in daily management or activities	93

Articles

Lorenzo Bonanno, Guy Buckley, "Limited Liability Partnerships", Canadian Tax Highlights, Vol. 25, No. 2, February 2017, p. 7

Partial v. full-shield protection (p. 7)

Partial-shield protection limits liability from…liabilities….only…arising from the negligence of another partner or an employee. … Full-shield protection generally protects a partner against most partnership liabilities. Exceptions include those that arise from the partner’s own professional negligence or misconduct.

Introduction of full-shield protection for Ontario LLPs engaged negative ACB rule (p. 8)

Legislative changes in 2006 to Ontario's Partnership Act…granted full-shield protection for an LLP governed by that Act….Thus, an LLP partner in Ontario is subject to subsection 40(3.1), because the LLP partner's liability, like that of a partner in a limited partnership as defined in paragraph 40(3.14)(a), is protected against most partnership liabilities except those that arise from the partner's own negligence.

Relief for advance draws from professional partnerships (p. 8)

[A]mendments to subsection 40(3.11)—subclauses 40(3.11)(A)(b) and s. 40(3.11)(B)(c)—allow current-year income or loss to be included in the ACB calculated for the year for a member of a "professional partnership."…This rule partly remedied the deficiency caused by the fact that a draw on income is usually made before an LLP's income is allocated….

Geneviève C. Lille, Elizabeth J. Johnson, "Partnerships: An Update", 2010 Conference Report (Toronto: Canadian Tax Foundation, 2011), 36:1-62

2003 comfort letter indicating that “full shield” partnerships were intended to be caught (p. 36:16)

A comfort letter from the Department of Finance, dated July 11, 2003, indicates that the department was asked to consider extending the exclusion in paragraph 40(3.14)(a) to interests in full shield LLPs. The department's response was that from a policy point of view a member in a full shield professional LLP should be treated in the same manner as a limited partner of any other partnership. However, the comfort letter indicated that the department was prepared to recommend that, for the purposes of applying the negative ACB rule in subsection 40(3.1) , the Act be amended to provide that the ACB could be adjusted at the end of the fiscal period of the LLP to reflect income (loss) for that fiscal period [see now para. (c) of B of s. 40(3.11)].

Subsection 40(3.15) - Excluded interest

Administrative Policy

24 June 2014 External T.I. 2014-0524331E5 - definition of excluded interest

40% indebtedness increase to below original amount was "substantial"

The Canadian "Partnership," which had operated its residential apartment building since 1988 without any expansion to or changes in its activities, refinanced the property in 2013 resulting in an increase of over 40% in the amount of its indebtedness at that time but with the increased indebtedness being less than that on February 22, 2004. After stating that the "determination does not involve any particular test, such as a point-in-time test," CRA concluded that "there has been a substantial increase in the indebtedness of the Partnership throughout the period."

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.16)	distribution not a qualifying use	127

13 April 2004 External T.I. 2003-0052291E5 F - Participation exclue - Par. 40(3.15) de la Loi

“exempt interest” status not lost if the partnership property becomes a source of property rather than active business income

A limited partnership formed before February 22, 1994 that generated business income from residential rental properties then entered into a 30-year lease of the property to a third party, so that the partnership has ceased to actively carry on a business, and is now earning income from property. Is the interest in the partnership still an "excluded interest"?

After noting that it was a question of fact whether there indeed had been a cessation of an active business (and noting in this regard that “a manufacturing business could downsize by subcontracting some of its operations and still be considered an active business”), CRA went on to indicate that it appeared that if there were such a change, the partnership would now satisfy the “income from property” branch of the test, so that the partnership interest continued to be an excluded interest, stating:

[I]f the partnership has held the real property since February 22, 1994 and has derived income (business or property) from it since that time, we are of the view that the interest in such a partnership still constitutes an "excluded interest" as defined in subsection 40(3.15) to the extent that it meets all the other conditions set out there.

22 May 1998 External T.I. 9806575 - EXCLUDED INTEREST

Where a partnership owns shares that are held for the purpose of earning income but out of which dividends are not declared in each year of their ownership, then provided dividends have been paid on the shares at anytime in the period referred in s. 40(3.15) and all other requirements have been met, the interest in the partnership can be considered an excluded interest throughout that period.

Subsection 40(3.16) - Amounts considered not to be substantial

Administrative Policy

24 June 2014 External T.I. 2014-0524331E5 - definition of excluded interest

distribution not a qualifying use

[T]he exception in paragraph 40(3.16)(d)… will only apply if the partnership's new indebtedness was used for an activity that was carried on by the partnership on February 22, 1994. …[T] here is no indication that this was the case, but rather…that the amount received under the refinancing may have been used by the Partnership to make distributions to the partners. Accordingly, paragraph 40(3.16)(d) would likely not apply… .

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.15)	40% indebtedness increase to below original amount was "substantial"	86

Subsection 40(3.3) - When subsection (3.4) applies

Administrative Policy

7 October 2022 APFF Financial Strategies and Instruments Roundtable Q. 4, 2022-0940941C6 - Stop-loss Rules

suspended loss rules engaged by shareholder, and shareholder’s RRSP acquiring and then holding identical shares during the 61-day period

On March 15, 2022, a corporation disposes of all of its shares (being 2,000) of ABC Pubco, and realizes a capital loss of $10,000. On March 16, 2022, its sole shareholder acquires 2,500 shares of ABC Pubco. In addition, the shareholder’s RRSP had acquired 1,500 shares of ABC Pubco on March 10, 2022. On May 20, 2022, the RRSP disposes of 1,500 shares of ABC Pubco and the shareholder disposes of 500 shares.

CRA indicated that as all the conditions in s. 40(3.3) were satisfied, the $10,000 loss would be suspended, and stated that “no portion of the corporation's loss could be recognized while the Shareholder owned shares of the capital stock of ABC Pubco constituting Substituted Property.”

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(f)	superficial loss allocated on a pooled basis to shares held at the end of the 61-day period by affiliated persons	241
Tax Topics - Income Tax Act - Section 54 - Superficial Loss	formula for prorating superficial loss is inapplicable where the number of shares held by affiliated persons has increased at the end of the 61-day period	239

2021 Ruling 2021-0895071R3 F - Partnership Reorganization

refusal to rule where shares received on LP s. 98(3) wind-up immediately sold to Carry LP owned by owners of former general partner

Fund LP sells enough of its shares on the stock exchanges in order to generate proceeds sufficient to distribute the amount of the contributed capital and preferred return thereon to all the non-carry partners, such that Carry LP and the other limited partners will now be entitled to share in future distributions on a pro rata basis.
Fund LP transfers its Rollover Shares and Other Investments on a s. 97(2) rollover basis to a new subsidiary LP (New LP) in consideration for the plain-vanilla units.
Within 30 days of 2 above, Fund LP is wound up such that its partners receive undivided interests in all its property (essentially, the Non-Rollover Shares and the units of New LP), with a joint s. 98(3) election filed.
Pursuant to a partition agreement, each of the former partners receives a pro rata fraction of each Non-Rollover Share and each New LP Unit.
The other former partners sell their respective fractions of Non-Rollover Shares to Carry LP for cash consideration equaling the FMV thereof.

The CRA summary discloses that the requested rulings included that s. 40(3.4) did not apply to suspend the capital loss realized on the sale of the Non-Rollover Shares to Carry LP, as to which CRA noted:

No conclusion reached; ruling withdrawn.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 98 - Subsection 98(3)	conversion of a carry to a straight-up interest	476
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.12)	no s. 40(3.12) ruling given re loss on fund LP wind-up	380

6 October 2017 APFF Financial Strategies and Instruments Roundtable Q. 10, 2017-0705201C6 F - Capital loss - repayment of loan

the foreign currency deemed to be disposed of under s. 39(2) by an FX borrower on repaying a USD loan is not identical property to the USDs received by it under a replacement loan

On the repayment (on maturity) of a U.S.-dollar loan that had been received from an affiliated trust, the borrower sustains a foreign exchange loss. The trust keeps the repayment proceeds as cash during the following 30 days or reinvests them.

(a) If the repayment proceeds of the loan (which, thus, has disappeared from the trust’s balance sheet) are kept in cash and no further loan is made during the period of 30 days before or after the repayment, can CRA confirm that the loss realized by the borrower on the repayment would not be a superficial loss?

(b) What if the trust makes a new U.S.-dollar loan to the borrower during the 30-day period following the initial loan’s repayment (or the 30 days before)?

In finding that, in (a), the suspended loss rule in s. 40(3.4) (or superficial loss rule in s. 40(2)(g)(i)) would not apply, CRA stated:

[T]he borrowing would be one of the borrower's liabilities and, as such, would not be property of the borrower. Consequently, repayment of the loan by the borrower would not, in itself, constitute the disposition of a property by the borrower. Furthermore, although subsection 39(2) deems there to be a capital loss arising from the disposition of a currency other than Canadian currency, subsection 39(2) does not deem the affiliated creditor to have acquired the foreign currency which the borrower is deemed to have disposed of.

Respecting (b), CRA stated:

[T]he borrower would have received foreign currency by virtue of the new loan made to it. The issue is whether, for the purposes of subparagraph 40(2)(g)(i) or subsections 40(3.3) and (3.4), that foreign currency would be identical property to the currency that the borrower is deemed to have disposed of in accordance with subsection 39(2). According to the definition of "property" in subsection 248(1), money could constitute property unless a contrary intention is evident. However, the CRA's position is not to consider money to be identical property for the purposes of subparagraph 40(2)(g)(i) or subsections 40(3.3) and (3.4) in a circumstance such as this where a taxpayer sustains a loss under subsection 39(2).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Property	foreign currency is not property for purposes of the suspended-loss rules	184

3 February 2016 Internal T.I. 2015-0588791I7 - Meaning of substituted property

accrued loss on LLC shares recognized by conversion to an LP

LLC1, which is wholly owned by a Canadian partnership, held 49.9% of the units in LLC3 - with a further 0.1% held by LLC2 (a wholly-owned subsidiary of LLC1) and the remaining 50% of the LLC3 units held by a third party. LLC3 was converted into US LP2 (a Delaware limited partnership, or "DLP") pursuant to s. 17-217 of the Delaware Limited Partnership Act. Under the Internal Revenue Code, the conversion was treated as a continuance of LLC3 as a DLP. For ITA purposes, the Conversion resulted in the disposition by LLC1 and LLC2 of their respective units in LLC3 and the acquisition by LLC1 and LLC2 of units in US LP2, so that LLC1 recognized a foreign accrual property loss. In finding that the LLC3 and US LP2 units were not identical property, so that s. 40(3.3) did not apply to deny the loss, CRA stated:

These differences in inherent qualities and elements could result in a prospective buyer to have a preference of one property over the other, which would then result in the membership units in DLLC and the partnership units in DLP not being considered identical properties.

…The conversion of an entity from one legal form to another, such as the conversion from a DLLC to a DLP, is not one of the situations covered in subsection 40(3.5).

The economic similarities between the LLC1’s economic situation before and after the Conversion cannot be taken into account as this is not an inherent quality or element of the properties themselves.

6 January 2009 Internal T.I. 2008-0280111I7 - FX loss on disposition of cash

substituted property did not include cash

A Bermuda CFA (Forco) maintains U.S. dollar deposits and realizes FX losses when it uses such cash to pay a dividend or to make a loan. CRA referred to the statement in the definition of "property" in s. 248(1) that property includes money unless the contrary intention is evident, and then noted that if the stop-loss or superficial loss rules applied, "the suspended losses may be suspended indefinitely if Forco or any affiliated person receives additional $US cash." CRA then stated that "on a purposive reading, supported by policy guidance from the Department of Finance...the cash would not be 'property'....Consequently, those provisions do not apply...."

2007 Ruling 2007-0245281R3 - windup of income trust on sale of assets:3rd party

capital loss on redemption of trust units following distribution of most of its assets including as capital gains distribution

This contemplated the winding-up of an income fund (the "Fund") following its acquisition by a "Bidco" in which the Fund sold its assets (mostly an LP interest) for a Bidco note, distributed that note to Bidco in satisfaction of a capital distribution and capital gains distribution declared by the Fund trustees and then redeemed its units for nominal proceeds. The amount of the net capital gains allocation that was (separately) paid to the unitholder did not reduce the ACB of its units.

Ruling that ss. 40(3.3) and (3.4) and s. 107(1)(c), would not apply to any capital loss realized by a Bidco on the redemption of the units.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 53 - Subsection 53(2) - Paragraph 53(2)(h) - Subparagraph 53(2)(h)(i.1)	no ACB reduction for capital gains distribution by unit trust to bidco	86
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(21)	trustees making filings on behalf of terminated fund	48
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c)	assumed debt traceable to capital distribution	97
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6)	realization and distribution of target MFT gain	101
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1)		90
Tax Topics - Income Tax Act - Section 80 - Subsection 80(5)		90

21 March 2007 External T.I. 2004-0091061E5 - stop loss rules for depreciable property

After indicating that s. 13(21.2) would not apply to a transfer of depreciable property from a personal trust to a person affiliated with the trust, with the trust winding up within 30 days (as no person would be affiliated with the trust on the day that was 30 days after the transfer), CRA went on to indicate that the same result would not apply respecting the stop-loss rules in ss. 14(12), 18(15) and 40(3.3) et seq.:

These provisions will generally deny or suspend the loss if a person affiliated with the trust acquires the applicable type of property at any time within 30 days before or after the trust's disposition of the property.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.2)		49

4 April 2003 External T.I. 2002-0171635 F - PERTE APPARENTE

purchase within 30 days by daughter of share vendor’s controlling shareholder did not engage the superficial loss rules

Also released under document number 2002-01716350.

The suspended loss rules did not apply where a holding company sold its shares of a public corporation at a loss and, within 30 days of that sale, the daughter of its controlling shareholder purchased identical shares, given that a corporation which is wholly controlled by an individual and the individual's daughter are not affiliated under s. 251.1(1)(b).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 54 - Superficial Loss	purchase within 30 days by daughter of share vendor did not engage the superficial loss rules	46
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(1) - Paragraph 251.1(1)(a)	father and daughter not affiliated	46
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(1) - Paragraph 251.1(1)(b)	corporation and daughter of its controlling shareholder not affiliated	59

Articles

Marc Ton-That, Rick McLean, "Navigating the Stop-Loss Rules", Corporate Structures and Groups, Vol. VI, No. 3, p. 324.

Subsection 40(3.4) - Loss on certain properties

Administrative Policy

27 October 2014 Internal T.I. 2014-0534981I7 F - Subsection 40(3.4)

capital loss on partnership interest continues suspended following partnership dissolution

Canco 1 ("C1") disposed of its interest in a partnership ("P") in its 2008 taxation year to a corporation ("C2") which was affiliated under s. 251.1(1)(c)(i) (affiliated respective controllers), so that its resulting capital loss was suspended, and then recognized the capital loss in its 2009 return as a result of the dissolution of P in 2009. Did this dissolution in fact de-suspend the capital loss under s. 40(3.4)(b)(i)? After paraphrasing s. 40(3.4)(c) (corresponding to the postamble in s. 40(3.4)), the Directorate stated (TaxInterpretations translation):

[F]or the purposes of paragraph 40(3.4)(b), P, despite its dissolution, is deemed to have not ceased to have existed and C2 is deemed to be a partner holding its interest in P. Consequently, the conditions for the application of subparagraph 40(3.4)(b)(i) are not satisfied, in which case C1 cannot avail itself in the course of its taxation year ending in 2009 of the capital loss resulting from the disposition of its interest in P in favour of C2.

Furthermore, we consider that it would be appropriate to conclude that C1 will be able to claim the loss when it ceases to be affiliated with C2, or when there is an acquisition of control of C1, at least where this does not occur in the context of an avoidance transaction. …[W]e do not necessarily exclude the possibility of other release events.

2 July 2014 External T.I. 2014-0529731E5 F - Stop-loss Rules

taxpayer able to designate sourcing of disposed-of shares/illustration of application of CRA formula

In Scenario 1, Investco acquires 1,000 common shares of Pubco on January 1, 201X and acquires a further 200 shares on December 15, 201X. Pubco disposes of 200 shares to an unaffiliated person on December 16, 201X at a loss of $400, and a further 50 shares on December 31, 201X at a loss of $500. In all Scenarios, the shares are capital property. Investco treats the 200 shares disposed of on December 31 were those which it acquired on December 15, 201X (the "Replacement Property").

In Scenario 2, Investco acquires 100 common shares of Pubco on February 1. 201X and a further 50 shares on February 15, 201X. It disposes of 60 shares to an unaffiliated person on March 15, at a loss of $100, and a further 50 shares on March 16, 201X at no loss or gain.

Scenario 3 is the same as Scenario 2 except that the final disposition is of 25 shares.

Respecting Scenario 1, CRA stated (TaxInterpretations translation):

…Investco having chosen that the 200 shares…of Publico which it disposed of on December 31, 201X were the Replacement Property, it follows that at the end of the 60 day specified period, Portco or a person affiliated with it was not the owner of the Replacement Property… . As the condition specified in paragraph 40(3.3)(c) was not satisfied, the losses of $400 and $500 sustained by Portco were not deemed to be nil… .

Respecting Scenario 2, for the same reasons, the $100 loss of Portco was not denied.

In Scenario 3, the denied loss was computed in accordance with the formula

A/B*C

where

A was the number of shares of Publico comprising the Replacement Property at the end of the period (25),

B was the number of Publico shares sold on March 15, 201X (60), and

C was the loss resulting from the disposition of the share of Publico on that date ($100).

Accordingly, the denied loss was 25/60*$100, or $41.67.

28 November 2010 CTF Annual Roundtable Q. 8, 2010-0386311C6 - Subsection 40(3.4)

does the deemed existence of a partnership in the postamble to s. 40(3.4) apply for other purposes of the Act, e.g., subdivision j? CRA responded:

The postamble in subsection 40(3.4) was added to ensure that…former partners of the partnership who were members of the partnership immediately before it was wound up will be allowed to claim their share of the deferred loss as allocated to them pursuant to the rules in subsection 96(1).

6 October 2011 External T.I. 2011-0399611E5 - Subsections 40(3.3) and 40(3.4)

After referring to 2001-008815, which indicated that a taxpayer was permitted to recognize 99% of its capital loss when it acquired 100 shares of XYZ Co. and disposed of 99 shares within 30 days, CRA stated:

[T]he administrative position...cannot be extended to allow a portion of a capital loss denied under paragraph 40(3.4)(a), in respect of a previous disposition of property, to be claimed when the transferor or an affiliated person subsequently disposes of a portion of the substituted property." [emphasis added]

2010 Conference Report CRA Round Table, Q. 8 [not carried forward to Income Tax Technical News, No. 44]

The postamble in s. 40(3.4) was added to ensure that a previously suspended loss of a partnership could be reported "at the later time set out therein" notwithstanding an intervening winding-up of the partnership.

Thus, former partners of the partnership who were members of the partnership immediately before it was wound up will be allowed to claim their share of the deferred loss as allocated to them pursuant to the rules in subsection 96(1).

30 October 2003 External T.I. 2003-0037465 F - Subsections 40(3.3) & 40(3.4)

non-application of s. 40(3.4) where taxpayer acquires then immediately disposes of an additional block/ application of formula where it partially dips into existing block

Also released under document number 2003-00374650.

A taxpayer described in s. 40(3.3)(a), which on January 1, 200X had held 100 common shares of Pubco for at least three months, acquired an additional 50 shares on June 1, 200X, and on June 2, 200X, disposed of those additional shares to an unaffiliated person, sustaining a capital loss..

CCRA concluded that ss. 40(3.3) and 40(3.4) would not apply to suspend such loss. Although, during the 30 days plus and minus straddling the disposition date (i.e., June 1, 200X), the Taxpayer acquired identical property, at the end of that period, the taxpayer did not own the replacement property (i.e., the 50 additional common shares of Pubco, all of which were disposed of on June 2, 200X), so that the s. 40(3.3)(c) was not satisfied. However, CCRA noted that the ACB to the taxpayer of the 50 additional common shares of Pubco were to be determined taking into account s. 47(1).

In a variation on the above situation, on June 1, 200X, the taxpayer disposed of its 100 Pubco to an unaffiliated person, and on June 2, 200X, it acquired an additional 50 Pubco common shares.

CCRA indicated that although s. 40(3.4) would apply, under its administrative position, only 1/2 of the taxpayer's loss would be considered to be nil under s. 40(3.4)(a) under the formula:

Deemed nil loss = (the lesser of S, P and B) / S x L

where

S = the number of shares disposed of at that time	100
P = the number of shares acquired during the period described in paragraph 40(3.3)(b)	50
B = the number of shares remaining at the end of that period	50
L = the loss on the disposition otherwise determined
And therefore: Deemed nil loss =	50 / 100 x L

CCRA indicated that s. 40(3.4) would apply to the entire loss arising under a second variation, under which, on June 1, 200X, the taxpayer disposed of 50 of the 100 Pubco common shares and on June 2, 200X, acquired an additional 50 Pubco common shares of Pubco.

18 March 2003 External T.I. 2003-0002915 F - Subsections 40(3.3) & 40(3.4)

taxpayer can designate order of disposition

On December 16, 2002, Holdco sold 200 of its 1,000 common shares of a public corporation to an unaffiliated person $1,500, realizing a capital loss of $500, and less than 10 days after December 16, 2002, Holdco acquired 200 new common shares of the public corporation at a cost of $1,500. After noting that this transaction came within the suspended loss rule in ss. 40(3.3) and (3,4), CCRA stated:

As a result, Holdco's $500 capital loss would be deemed to be nil pursuant to paragraph 40(3.4)(a). In addition, the capital loss could not be added to the ACB of the common shares that were held by Holdco after the transactions described above.

There is no rule in the Act to determine, for the purposes of subsection 40(3.4), an order of disposition of shares that are identical properties. However, we are prepared to accept the order of disposition of identical shares that is chosen by a taxpayer for the purposes of subparagraph 40(3.4)(b)(i).

4 July 2001 External T.I. 2001-0088155 - Subsection 40(3.4)

partial loss recognition if share reduction

Respecting the situation where the taxpayer purchases 100 common shares of XYZ Co on January 1, 2001 and sells 99 shares on January 25, 2001 sustaining a capital loss of $1,000 on the sale, the Agency stated:

A strict interpretation of subsections 40(3.3) and 40(3.4) would deem the entire capital loss to be nil. However, the Canada Customs and Revenue Agency is prepared to administratively apply the following algebraic formula to determine which portion of the capital loss should be denied under subsection 40(3.4) of the Act:

DL = (least of S, P, and B) / S x L where

DL is the amount of loss deemed to be nil;

S is the number of items disposed at that time;

P is the number of items bought in the 60 day period;

B is the number of items left at the end of the period; and

L is the loss on the disposition as otherwise determined.

Paragraph 40(3.4)(b)

Subparagraph 40(3.4)(b)(i)

Administrative Policy

30 April 2019 Internal T.I. 2019-0793481I7 - Application of Paragraph 40(3.4)(b)

loss was de-suspended when CFA-formed-on-merger for purposes of s. 40(3.5)(c)(i) was wound-up

this was corrected in 2020-0852071I7: loss continued to be suspended if BCo wind-up was a DLAD

ACo, a Canadian public corporation, held the shares of three controlled foreign affiliates (CCo, DCo and BCo directly. Shares (that were excluded property) of a fourth CFA (FCo) with an accrued loss were held by CCo directly and by DCo through its subsidiary, ECo.

ECo transferred all of its shares of FCo to BCo in exchange for Class B common shares of BCo, having an equivalent fair market value, that tracked ECo’s indirect interest in FCo.
ACo transferred all its shares of CCo to BCo as a contribution of capital, thereby generating a suspended loss as per s. 40(3.4) (the “Suspended Loss”).
CCo was liquidated into BCo in a designated liquidation and dissolution (“DLAD”) occurring on a rollover basis under s. 95(2)(e), so that BCo acquired all of CCo’s Class B shares of FCo. 2017-0735771I7 concluded that the liquidation of CCo into BCo did not result in the Suspended Loss becoming available, as such liquidation was a “merger” under s. 40(3.5)(c)(i) – so that BCo was deemed to own the shares of CCo as long as BCo and ACo were affiliated and the presumption that the Suspended Loss was deemed to be nil applied over that period.
Subsequently to the transactions considered in 2017-0735771I7, ACo transferred its shares of BCo to DCo for consideration including shares of the capital stock of DCo pursuant to subsection 85.1(3) of the Act.
BCo disposed of Class B shares of FCo to arm’s length parties through open market trades.

Would a liquidation of BCo into DCo result in the Suspended Loss becoming available to ACo under paragraph 40(3.4)(b) as a result of the liquidation of BCo? CRA responded:

… BCo is deemed to own the shares of CCo while it is affiliated with ACo (i.e., the transferor).

Upon the completion of the liquidation of BCo, it would no longer be affiliated with ACo.

… Pursuant to subparagraph 40(3.4)(b)(i), the Suspended Loss will be deemed to be a capital loss of ACo immediately after the completion of the liquidation of BCo.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.5) - Paragraph 40(3.5)(c) - Subparagraph 40(3.5)(c)(i)	a loss that was suspended under s. 40(3.5)(c)(i), can be de-suspended by winding-up the CFA referenced under s. 40(3.5)(c)(i)	198

Subsection 40(3.5) - Deemed identical property

Administrative Policy

14 March 2003 Internal T.I. 2003-0182977 F - 40(3.5)(c)

Where a public corporation ("Parentco") holding shares of a public corporation ("Subco") with an accrued loss, sells the shares to a newly-incorporated subsidiary ("Newco") and Subco and Newco then merge within 30 days on a triangular amalgamation, the capital loss otherwise realized by Parentco on the transfer of the shares will be denied by s. 40(3.4). The position of the taxpayer "that in order that 40(3.5)(c) applies, a share disposed of must first meet the three conditions under s. 40(3.3) applicable to capital property disposed of and for a period of 30 days after the disposition, before the deeming rule provided under s. 40(3.5)(c) can be taken into consideration" did not make sense.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.5) - Paragraph 40(3.5)(c)	deeming rule in s. 40(5)(c) applies for purposes of the preconditions in s. 40(3.3) as to whether s. 40(3.4) applies	237

Articles

Carrie Smit, "Exchangeable Shares: Not Just Rights to Foreign Shares", CCH International Tax, No. 59, August 2011, p. 1

In discussing the 10737 Newfoundland case, notes that "the recognition of an exchangeable share as the particular property disposed of (as opposed to a right to acquire a foreign share) would imply that the loss suspension rule in subsection 40(3.4) may not apply where a taxpayer disposes of a share of a corporation and acquires another share which is convertible or exchangeable into that share."

She also notes that "it could be argued that the deeming rule in paragraph 40(3.5)(a) only applies to deem a right to acquire property to be identical to the specific property, but not vice versa."

Paragraph 40(3.5)(b)

Administrative Policy

26 January 2018 Internal T.I. 2017-0735771I7 - Application of paragraph 40(3.5)(c)

scope of s. 40(3.5)(b) extends to mergers and constructive formation of new entities

Canco realized a suspended loss when it contributed its shares of a controlled foreign affiliate (CCo) to another CFA (BCo), and then took the position that such loss was de-suspended when CCo was then liquidated into BCo. This position turned on the proposition that s. 40(3.5)(c)(i) did not apply because such liquidation did not satisfy two requirements in order for s. 40(3.5)(c)(i) to apply: the liquidation (a.k.a., winding-up) was not a "merger" of the loss corporation (CCo) with another corporation (BCo); and such "merger" resulting in the formation of a corporation (BCo).

CRA inferred from the somewhat loose meaning of the term “merger” and the fact that various provisions (but not s. 40(3.5)(c)(i)) exclude a winding-up from a merger, that the liquidation of CCo into BCo was a merger of the two corporations, and then took the further position that it could be inferred from the fact that s. 40(3.5)(c)(i) is stated not to apply to mergers referred to in s. 40(3.5)(b) - which refers to rollover transactions, some of which do not result in a new legal entity being formed - that BCo (which, was already in existence) nonetheless was to be regarded as having been formed on the liquidation.

In commenting in this regard on s. 40(3.5)(b), the Directorate stated:

Generally speaking, paragraph 40(3.5)(b) provides that a share of the capital stock of a corporation that is acquired (i.e., new share) in exchange for another share (i.e., old share) in a transaction is deemed to be a property that is identical to the other share (i.e., old share) if section 51, 86, 87 or 85.1 applies to the transaction. Accordingly, in addition to a winding-up, transactions that fall within sections 51, 86, 87 or 85.1 may also fall within the ambit of a “merger” for purposes of subparagraph 40(3.5)(c)(i). …

Above, it was noted that transactions that fall within sections 51, 86, 87 or 85.1 are carved out of a “merger” in subparagraph 40(3.5)(c)(i). Accordingly, the term “merger” as used therein is broad enough to capture a subsection 86(1) reorganization of capital, as one example. The rollover provisions of subsection 86(1) apply where all of the shares of the capital stock of a particular class are exchanged for new shares in the course of a reorganization of the corporation’s capital. In such a transaction there is no corporation “formed” in the traditional sense. The same can be said for transactions that fall within sections 51 and 85.1. Consequently, the use of the word “formed” in subparagraph 40(3.5)(c)(i) does not, in our view, preclude a merger from including a winding-up.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.5) - Paragraph 40(3.5)(c) - Subparagraph 40(3.5)(c)(i)	a suspended loss on the sale of CFA1 to CFA2 was not de-suspended on s. 95(2)(e) wind-up of CFA1 into CFA2	478
Tax Topics - Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(e)	S. 95(2)(e) wind-up constructively resulted in formation of new corporation	79

16 October 2009 Internal T.I. 2009-0337721I7 F - Perte lors de fusion étrangère

s. 40(3.4) not applicable to foreign triangular merger to which s. 87(8) was elected not to apply

Holdco, a CCPC, received shares of the foreign merged corporation in replacement of its shares of a public American company, and elected in an amended return for s. 87(8) to not apply. The Directorate noted that superficial and suspended loss rules in ss. 40(2)(g)(i) and 40(3.4) would not apply given that the replacement shares were not identical property.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 87 - Subsection 87(8)	claiming of capital loss in promptly-filed amended return would be accepted as an election	223

Paragraph 40(3.5)(c)

Cases

Canada v. Cascades Inc., 2009 DTC 6122, 2009 FCA 135

"apply" does not mean "triggered results under"

The trial judge had found that the stop-loss rule in s. 40(3.4) did not apply to the disposition by the taxpayer of shares of a subsidiary ("PII") at a loss to another newly-incorporated subsidiary because within 30 days of that disposition, the two subsidiaries were amalgamated - on the basis that the presumption in s. 40(3.5)(c) only applied if subsections 40(3.3) and (3.4) had already been applied, whereas here not all the conditions of s. 40(3.3) had been met (because the shares of the transferee corporation had to cease to exist as a result of the amalgamation within the 30 day period).

In reversing this decision, Nadon, J.A. stated (at para. 30) that the word "apply" meant "'pertain', 'relate', 'concern', 'deal with'" so that s. 40(3.5) did not require the three conditions of s. 40(3.3) be met before the presumptions in s. 40(3.5)(c) applied. Accordingly, because s. 40(3.5)(c) deemed the transferee subsidiary to continue to exist, the stop-loss rule in s. 40(3.4) applied.

Words and Phrases

apply

Administrative Policy

14 March 2003 Internal T.I. 2003-0182977 F - 40(3.5)(c)

deeming rule in s. 40(5)(c) applies for purposes of the preconditions in s. 40(3.3) as to whether s. 40(3.4) applies

Where a public corporation ("Parentco") holding shares of a public corporation ("Subco") with an accrued loss, sells the shares to a newly-incorporated subsidiary ("Newco") and Subco and Newco then merge within 30 days on a triangular amalgamation so that the minority shareholders of Subco become shareholders of Parentco, the capital loss otherwise realized by Parentco on the transfer of the shares will be denied by s. 40(3.4). The position of the taxpayer that “a share of the capital stock of a corporation that has been disposed of must first be held by an affiliated person at the end of the period ending 30 days after its disposition as non-depreciable capital property before the deemed ownership of a share of the capital stock of a corporation in paragraph 40(3.5)(c) can be considered” did not make sense. The Directorate stated:

[I]t is not only the word "apply" in paragraph 40(3.5)(c) that must be interpreted, nor just the expression "if subsections 40(3.3) and 40(3. 4) apply", but rather the broader expression "[f]or the purposes of subsections 40(3.3) and 40(3.4) ... where subsections 40(3.3) and 40(3.4) apply to the disposition by a transferor of a share of the capital stock of a corporation". In our view, this expression should be interpreted as meaning, "The following deeming rules apply for the purposes of subsections 40(3.3) and 40(3.4); ...where subsections 40(3.3) and 40(3.4) apply to the disposition by a transferor of a share of the capital stock of a corporation... ".

Words and Phrases

apply

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.5)		111

Subparagraph 40(3.5)(c)(i)

Administrative Policy

4 October 2023 Internal T.I. 2020-0837811I7 F - Suspended loss

suspended loss rule continued to apply when the transferee was amalgamated, then wound-up into the transferor

Aco (a taxable Canadian corporation) disposed of its shares of Cco (the “Subject Shares”) at a loss to a wholly-owned subsidiary of Aco (Bco). There was then an amalgamation of Bco and Cco, to which s. 87(9) applied, resulting in Aco becoming the sole shareholder of Amalco. S. 40(3.5)(c)(i) deemed Amalco to own the Subject Shares for as long as it was affiliated with the transferor (Aco). Amalco was then wound-up into Aco (the "Winding-up") pursuant to s. 88(1), and dissolved. Aco argued that on the winding-up, Amalco (as a continuation of Bco, the transferee of the subject Shares) ceased to be affiliated with the transferor (Aco), so that this triggered the suspended loss pursuant to s. 40(3.4)(b)(i).

In rejecting this argument, the Directorate indicated that by virtue of s. 87(2)(g.4), Aco was considered following the Winding-up to be a continuation of Amalco, and to own the Subject Shares and, given that under s. 251.1(4)(a), a person is affiliated with itself, Aco as the transferor continued to be affiliated with the person (Aco in its capacity of a continuation of Amalco and Bco) who was the deemed owner of the Subject Shares.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(4) - Paragraph 251.1(4)(a)	corporation in its 2 capacities of transferor, and continuation of transferee, was affiliated with itself	160

29 July 2020 Internal T.I. 2020-0852071I7 - Clarification of views noted in 2019-0793481I7

DLAD winding-up of FA referenced in s. 40(3.5)(c)(i) caused it to apply to FA parent successor

commented on in 2020-0837811I7 F

A Canadian corporation (ACo) realized a suspended loss when it contributed its shares (i.e., in a drop-down to which s. 85.1(3) did not apply) of a controlled foreign affiliate (CCo) to another CFA (BCo), and then CCo was then liquidated under s. 95(2)(e) into BCo. In 2017-0735771I7, Headquarters considered that such loss was suspended on the basis that, for purposes of s. 40(3.5)(c)(i), Bco was a corporation “formed” on the “merger” of CCo with BCo – with the result that BCo was deemed to continue to own the shares of CCo with which it was affiliated, notwithstanding that CCo had, in fact, ceased to exist.

Headquarters was subsequently asked in 2019-0793481I7 to consider the consequences of ACo dropping its shares of Bco under s. 85.1(3) into another ACo CFA (DCo) followed by a sale by BCo of its subsidiary (Fco - whose decline in value had caused the decline in value of its own shares) to an arm’s length purchaser, and then by the wind-up of BCo into DCo and into another CFA (ECo) through which DCo had held part of its intrest in BCo. Headquarters concluded that this resulted in the loss being de-suspended, stating that “[u]pon the completion of the liquidation of BCo, it would no longer be affiliated with ACo,” so that the suspended loss was deemed to be a capital loss of ACo immediately after the completion of the liquidation of BCo.

Headquarters, in this Interpretation, clarified that such winding-up of BCo could be a “designated liquidation and dissolution” described in s. 95(2)(e) – in which event, s. 95(2)(e)(v)(A)(III) would deem DCo to be a continuation of BCo for s. 40(3.5)(c) purposes respecting shares that were deemed under that paragraph to be owned by BCo before the DLAD (i.e., respecting its deemed continued ownership of the CCo shares) – so that the loss on the CCo shares continued to be suspended.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(e) - Subparagraph 95(2)(e)(v) - Clause 95(2)(e)(v)(A) - Subclause 95(2)(e)(v)(A)(III)	a loss that was suspended under s. 40(3.5)(c)(i), could not be de-suspended by a DLAD winding-up of the CFA referenced under s. 40(3.5)(c)(i)	496

30 April 2019 Internal T.I. 2019-0793481I7 - Application of Paragraph 40(3.4)(b)

a loss that was suspended under s. 40(3.5)(c)(i), can be de-suspended by winding-up the CFA referenced under s. 40(3.5)(c)(i)

overruled by 2020-0852071I7: loss continued to be suspended if BCo wind-up was a DLAD

Canco realized a suspended loss when it contributed its shares of a controlled foreign affiliate (CCo) to another CFA (BCo), and then took the position that such loss was de-suspended when CCo was then liquidated under s. 95(2)(e) into BCo. In 2017-0735771I7, Headquarters rejected this position on the basis that, for purposes of s. 40(3.5)(c)(i), Bco was a corporation “formed” on the “merger” of CCo with BCo – with the result that BCo was deemed to continue to own the shares of CCo with which it was affiliated, notwithstanding that CCo had, in fact, ceased to exist.

Headquarters was subsequently asked to consider the consequences of Canco dropping its shares of Bco under s. 85.1(3) into another Canco CFA (DCo) followed by the wind-up of BCo into DCo.

Headquarters concluded that this resulted in the loss being de-suspended, stating:

Upon the completion of the liquidation of BCo, it would no longer be affiliated with ACo.

… Pursuant to subparagraph 40(3.4)(b)(i), the Suspended Loss will be deemed to be a capital loss of ACo immediately after the completion of the liquidation of BCo.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.4) - Paragraph 40(3.4)(b) - Subparagraph 40(3.4)(b)(i)	loss was de-suspended when CFA-formed-on-merger for purposes of s. 40(3.5)(c)(i) was wound-up	387

25 June 2018 Internal T.I. 2017-0737151I7 - Application of paragraph 40(3.5)(c)

the wind-up of a CFA into three shareholders is a merger to form three corporations

CCo was a non-resident private unlimited company and holding company whose ordinary shares were held by ACo (a Canadian-resident corporation that was wholly-owned by BCo, a Canadian-resident public company) and by another private unlimited company (DCo) that was an indirect subsidiary of BCo. As a result of a sale of its business carried on through various foreign affiliates, the only asset of CCo was a receivable from another CFA of BCo. ACo realized a capital loss that was suspended under s. 40(3.4)(a) when it disposed of all of its shares of CCo to BCo as a dividend in kind.

BCo then transferred a portion all of its shares of CCo to a newly-formed corporation (FCo). Following the payment of an “interim dividend” by CCo to FCo and BCo, CCo was wound-up into its three shareholders (BCo, FCo and DCo).

The Directorate essentially followed the analysis in 2017-0735771I7 and 2018-0745501C6 to conclude that ACo’s capital loss was de-suspended when CCo was liquidated into its shareholders – with this turning on the propositions that such liquidation satisfied the two requirements in order for s. 40(3.5)(c)(i) to apply: the liquidation (a.k.a., winding-up) was not a "merger" of the loss corporation (CCo) with another corporation (BCo, FCo and DCo); and such "merger" resulting in the formation of a corporation (BCo, FCo and DCo).

The chief additional issue was that there were three rather than one shareholder of the wound-up corporation. In this regard, the Directorate referred to s. 33(2) of the Interpretation Act ("Words in the singular include the plural”) and s. 3(1) ("unless a contrary intention appears"), and stated:

Accordingly, subparagraph 40(3.5)(c)(i) may also be read in a manner that accommodates the formation of more than one corporation … .

[S]ince a corporation may wind-up into more than one shareholder corporation, an interpretation of subparagraph 40(3.5)(c)(i) that accommodates such transaction is appropriate.

After stating that:

It appears that Parliament wanted to ensure that, pursuant to the deemed continuity rules, a suspended loss does not become available where the transferred corporation is subsequently wound up on a tax deferred basis.

the Directorate went on to note that for s. 40(3.5)(c) purposes CCo’s wind-up:

should be afforded the same treatment as a tax deferred wind up (i.e., a windup of CCo into a Canadian company on a tax deferred basis). This is supported by the fact that a tax deferred wind-up generally represents a deferral of Canadian income tax on any accrued gain and a wind-up of a corporation outside of Canada results in no Canadian income tax.

Locations of other summaries		Wordcount
Tax Topics - Statutory Interpretation - Interpretation Act - Subsection 33(2)	reference to merger to form one corporation included three	110

26 January 2018 Internal T.I. 2017-0735771I7 - Application of paragraph 40(3.5)(c)

a suspended loss on the sale of CFA1 to CFA2 was not de-suspended on s. 95(2)(e) wind-up of CFA1 into CFA2

subsequent transactions were considered in 2019-0793481I7

ECo transferred all of its shares of FCo to BCo in exchange for Class B common shares of BCo, having an equivalent fair market value, that tracked ECo’s indirect interest in FCo.
ACo transferred all its shares of CCo to BCo as a contribution of capital, thereby generating a suspended loss as per s. 40(3.4) (the “Suspended Loss”).
CCo was liquidated into BCo in a designated liquidation and dissolution (“DLAD”) occurring on a rollover basis under s. 95(2)(e), so that BCo acquired all of CCo’s Class B shares of FCo and some nominal cash.

Did the liquidation of CCo result in the Suspended Loss becoming available pursuant to s. 40(3.4)(b)(i)?

Respecting whether there was a “merger” of CCo with BCo as per s. 40(3.5)(c)(i), the Directorate stated:

[S]uch term is broad and encompassing and may include a winding-up. Furthermore … had Parliament intended to exclude a winding-up from the reference to “merger” in subparagraph 40(3.5)(c)(i), it would have specifically done so by incorporating exclusionary wording to that effect, as was done in subsections 87(1), 87(8.1), 87(8.2), 89(1) and 128.2(3) … [which] carve out a winding-up … . Lastly, the various provisions referred to in paragraph 40(3.5)(b) and the carve-out of these provisions in the context of the term “merger” in subparagraph 40(3.5)(c)(i), lends additional support for the broadness of that term as used in the context of subsection 40(3.5).

In finding that BCo also was “formed” on such merger, the Directorate stated:

Based on the wording of subparagraph 40(3.5)(c)(i) and the specific carve out of a number of transactions in paragraph 40(3.5)(b) that do not result in a corporation being “formed” in the traditional sense, it is evident that the use of the word “formed” should be broadly interpreted within the context of the provisions at hand. This is further evidenced by the use of the word “formed” in subsections 87(1), 87(8.1) and 128.2(1).

In further finding that its conclusion - that the Suspended Loss continued to be suspended - was supported by the purpose of the suspended loss rules, the Directorate stated:

[T]he purpose of the stop-loss rules in subsections 40(3.3), 40(3.4) and 40(3.5) is to defer the recognition of losses incurred in an affiliated-party. Such purpose becomes especially evident or useful in circumstances that reveal there to be no true economic loss incurred by the transferor or by the affiliated group as a whole.

Words and Phrases

merger formed

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.5) - Paragraph 40(3.5)(b)	scope of s. 40(3.5)(b) extends to mergers and constructive formation of new entities	443
Tax Topics - Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(e)	S. 95(2)(e) wind-up constructively resulted in formation of new corporation	79

16 May 2018 IFA Roundtable Q. 5, 2018-0745501C6 - Meaning of “merged or combined” in 40(3.5)(c)(i)

suspended loss on the sale of CFA to Subco was not de-suspended on s. 88(3) wind-up of CFA

Canco sold all the shares of FA to Canco’s wholly-owned subsidiary (Subco) and realized a capital loss that was suspended under s. 40(3.4). In a subsequent year, Subco will wind-up FA and elect to treat this as a qualifying liquidation and dissolution under s. 88(3). Does the deemed continuity rule in s. 40(3.5)(c)(i) apply?

CRA indicated that it considered the phrase “merged or combined” in s. 40(3.5)(c)(i) as encompassing a winding-up or liquidation. This was supported by the exclusion in various provisions of a winding up or liquidation from a “merger” including s. 87(1), 87(8.1), 7(8.2), the definition of “Canadian corporation” in s. 89(1), and s. 128.2(3). Similarly, s. 40(3.5)(c)(i) carves out from a merger or combination a number of reorganizations referred to in s. 40(3.5)(b), which in turn refers to ss. 51, 86, 87, and 85.1.

“Formed” as used in s. 40(3.5)(c)(i) also is broadly interpreted to include an entity in place after a reorganization (for example, a s. 86(1) reorganization), even though no new entity may be formed in the traditional sense). Accordingly, the reference to the corporation “formed” would include Subco. Thus, the deemed continuation rules in s. 40(3.5)(c)(i) apply to the wind-up of FA, so that Canco’s loss remains suspended.

Words and Phrases

merged or combined formed

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 88 - Subsection 88(3)	s. 88(3) wind-up of CFA formed a new corporation	173

Articles

Ian Bradley, Jonathan Bright, "The Stop-Loss Rules and Corporate Reorganizations – Interpretive Challenges", Canadian Tax Journal, (2019) 67:2, 383-410

Interpretation of "merger or combination" (pp. 391, 394, 396)

The CRA's interpretation of subparagraph 40(3.5)(c)(i) [in 2017-073715117] is based heavily on its interpretation of certain words in the provision—in particular, that the words "merger or combination" can include a winding up, and that "the corporation formed" on a merger combination can--refer to a shareholder of a woundup corporation. …

[A]ll three Terms—"winding up, '' “dissolution," and "liquidation"—are generally understood to refer to the same process, through which a corporation transfers its assets and ceases to exist….

[I]n the French version of subparagraph 40(3.5)(c)(i), the words "fusion" and “combinaison" are used in place of "merger" and "combination." In Quebec corporate law, the term "fusion" appears to be used as the French equivalent of the English word “amalgamation. … [I]t suggests that the word "merger" in subparagraph 40(3.5)(c)(i) (and, by extension, the word "fusion" as it was used by the court in Black & Decker) more appropriately refers to amalgamations (and similar foreign reorganizations), rather than having the broader connotations suggested by the CRA.

Interpretation of "formed" (pp. 396 – 398)

[T]he word “formed” appears to refer to a corporation that comes into existence as a result of the merger or combination, such as a corporation formed on an amalgamation. … [T]he Tax Court of Canada appears to have interpreted the word “formation" in a similar manner in … 1591141 Alberta …, 2014 TCC 2 . …

[E]ven if a winding up … could be considered a "merger" or a "combination" under a broad operational definition of those terms, it could not be a merger or combination described in subparagraph 40(3.5)(c)(i) because it does not result in the formation of a corporation… .

The CRA claimed [in 2017-073715117] that subparagraph 40(3.5)(c)(i) can apply to a winding up of a corporation with multiple shareholders… .

[A] transaction that resulted in the formation of multiple entities would not be a merger or combination; it would be closer to a spinoff or division transaction (such as the transactions described in section 86.1 and subsection 15(1.5)). The Interpretation Act [s. 33(2)] cannot alter the fundamental meshing of subparagraph 40(3.5)(c)(i) and the words used in this provision.

Context to merger or combination concept (pp. 399 – 402)

[T]he CRA noted that certain provisions in the Act that refer to mergers or combinations expressly exclude transactions that involve the distribution of property upon the winding up of a corporation. These provisions include … subsections 87(1) and (8.1) … as well as…subsection 87(8.2)… .

… The exclusion of windups in the "amalgamation" and "foreign merger" definitions does not mean that every winding up would otherwise be considered a merger or combination….

[A]bsorptive mergers…involve elements of both amalgamations and windups. …

[A] plan of arrangement may be used to achieve a result similar to an absorptive merger… .

[T]he word "unification" is not used in the French version of paragraph 40(3.5)(c). This suggests that the word “merger" in subparagraph 40(3.5)(c)(i) is intended to refer to amalgamations (and possibly to similar foreign transactions), or at least that the word "merger" is used somewhat interchangeably with "amalgamation" in this context, rather than having a broader meaning.

… [S]ubsection 90(6.11)…indicates that windups and mergers are distinct types of corporate reorganizations… .

Likely limitation of merger concept to amalgamations or near equivalents (pp. 403-404)

[I]f [CRA’s] interpretation were correct, subparagraph 40(3.5)(c)(i) would apply to all of the transactions described in subparagraphs 40(3.5)(c)(ii) and (iii)… .

… The CRA’s interpretation would therefore render subparagraphs 40(3.5)(c)(ii) and (iii) redundant… .

… Interpreting subparagraph 40(3.5)(c)(i) in its statutory context therefore indicates that the provision applies to Canadian amalgamations and similar foreign reorganizations, in which two or more companies merge to form a single corporate entity (such as foreign mergers described in subsection 87(8.1).) …

[T]here is a simpler explanation for the explicit exclusion of transactions described in paragraph 40(3.5)(b): these transactions include amalgamations and foreign mergers. For example, if subsection 40(3.4) applies to a disposition of shares of a particular corporation, and those shares are subsequently exchanged for new shares on an amalgamation of the particular corporation, subsection 87(4) may apply to the share exchange. In these circumstances, paragraph 40(3.5)(b) will deem the new shares to be identical to the old shares. But for the exclusion of paragraph 40(3.5)(b) transactions in subparagraph 40(3.5)(c)(i), this provision would also apply (to deem the corporation formed on the amalgamation to own the old shares while it is affiliated with the transferor). The exclusion therefore plays a clear role in the overall context of the stop-loss rules: it prevents two different continuity rules from applying to the same amalgamation (or foreign merger), producing different (and potentially conflicting) results. It does not mean that subparagraph 40(3.5)(c)(i) would otherwise apply to all share exchanges.

Explanatory Notes (pp. 405-406)

Paragraph 49(3.5)(c) was amended to take on its current form in 2013… .

[T]he technical notes do not explain why the word “combination” was added to subparagraph 40(3.5)(c)(i). … [T]his change may have been intended to address foreign reorganizations that are similar to Canadian amalgamations. There is no indication that subparagraph 40(3.5)(c)(i) was meant to address windups. … .

Example of uncertainties generated by CRA approach (pp. 387-388, 408)

BB Inc. a corporation resident in Canada…is the sole shareholder of BB Stars and BB Stripes, both of which are corporations resident in the United States…

BB Inc. and BB Stripes are equal (50 percent) shareholders of BB Freedom…also a corporation resident in the United States…

BB Inc. transfers its 50 percent interest in BB Freedom to BB Stars…BB Inc. has a loss on the transfer, which is suspended by subsection 40(3.4).

BB Freedom files articles of dissolution and makes liquidating distributions to both BB Stars and BB Stripes.

Although the liquidation and dissolution or BB freedom appears subparagraph 40(3.5)(c)(iii) would not apply, because the transferor (BB Inc.) is not a foreign affiliate. Many practitioners have believed for some time that in this scenario the suspended loss on the BB Freedom shares would be released upon BB Freedom's winding up, because a winding up of this type is not described in subparagraph 40(3.5)(c)(ii) or (iii). However, the CRA has challenged this widely held belief….

[I]f the CRA's interpretation of subparagraph 40(3.5)(c)(i) were correct, the winding up of BB Freedom would not release the suspended loss on its shares. BB Stars and BB Stripes would be deemed to own the shares of BB Freedom while they remained affiliated with BB Inc. If BB Inc. subsequently sold BB Stripes to a non-affiliated person, it is not clear how this would affect the suspended loss. When commenting on a winding up of a corporation with multiple shareholders, the CRA stated that subparagraph 40(3.5)(c)(i) would deem each shareholder to own its respective interest in the shares of the wound-up corporation. The CRA might therefore consider BB Stripes to own 50 percent of the BB Freedom shares, suggesting that the BB Stripes sale could release 50 percent of the suspended loss. However, there does not seem to be support for such an approach in the words of the provision.

Consider the alternative scenario depicted in figure 2. In this example, BB Stripes is always owned by a non-affiliated person (rather than BB Inc.). The winding up of BB Freedom would not be a DLAD and would therefore be taxable under the foreign affiliate rules. However, if the CRA's interpretation of subparagraph 40(3.5)(c)(i) were correct, it appears that the provision could still apply in these circumstances. It is not clear whether this winding up would release 50 percent-of the loss (since the 50 percent shareholder of BB Freedom would be a non-affiliated person) or whether the full loss would remain suspended.

These difficulties result from attempting to stretch the application of subparagraph 40(3.5)(c)(i) beyond its intended scope.

Policy driver behind CRA position (p. 410)

[T]he CRA’s interpretation of subparagraph 40(3.5(c)(i) appears to be driven by a policy goal that suspended losses should not be released as a result of a winding up that is not subject to Canadian tax (either because the winding up qualifies for Canadian tax deferral or because the parties to the winding up are outside the reach of the Canadian tax system). However, this policy objective seems to be inconsistent with the scope of the existing rules … .

Words and Phrases

merger combination winding-up

Locations of other summaries		Wordcount
Tax Topics - Statutory Interpretation - Interpretation Act - Subsection 33(2)		106

Subsection 40(3.6) - Loss on shares

Cases

Canadian Imperial Bank of Commerce v. Canada, 2023 FCA 91

s. 40(3.6) applied to deny an FX loss arising on shares

Commentary: Elie S. Roth and Ryan Wolfe, “CIBC v. Canada: A Matter of Precedence,” International Tax Highlights, Vol. 2, No. 3, August 2023, p. 10

CIBC realized an FX loss of C$126.4 million in 2007 when shares of a US subsidiary for which it had subscribed US$1 billion approximately 11 months’ earlier were redeemed for US$1 billion. The Tax Court had rejected the CIBC position that such loss was deemed by s. 39(2) to be a capital loss from foreign currency and therefore was excluded from the application of the s. 40(3.6) stop-loss rule (which applied only if the loss were viewed as having arisen from the disposition of the subsidiary’s shares.)

In dismissing CIBC’s appeal, Webb JA stated (at para. 45):

There is nothing in subsection 40(3.6) of the ITA that would require the application of subsection 39(2) of the ITA before the loss realized on the redemption of shares is deemed to be nil by subsection 40(3.6) of the ITA. As subsection 40(3.6) of the ITA is a provision that expressly provides for the determination of the amount of the loss, it overrides subsection 40(1) of the ITA. As a result, the loss realized by CIBC on the redemption of shares is deemed to be nil and, therefore, there is no loss that could have been deemed to be a capital loss under subsection 39(2) of the ITA.

In distinguishing BMO (which found that s. 39(2) deemed the loss from a disposition of shares arising from a foreign exchange fluctuation to be a capital loss from a disposition of foreign currency and not from the disposition of shares, so that there was no capital loss from shares to which the stop-loss rule in s. 112(3.1) could apply), he noted that s. 112(3.1), by its terms, only applied to “that share of the loss determined without reference to this subsection,” and then stated (at para. 46):

The wording of subsections 40(3.6) and 112(3.1) of the ITA provided that, in 2007, all other provisions of the ITA affecting the loss (including subsection 39(2), as it was then worded) applied before subsection 112(3.1) of the ITA applied and that subsection 40(3.6) of the ITA applied before subsection 39(2) of the ITA applied.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(2)	s. 40(3.6) applied to capital loss on shares before it was deemed to be an FX loss by s. 39(2)	323
Tax Topics - Statutory Interpretation - Double Taxation/Deduction (Presumption Against)	no intention to create 2 capital losses out of 1	80
Tax Topics - Statutory Interpretation - Interpretation/Definition Provisions	deeming provision altered reality	131

Administrative Policy

12 January 2015 Internal T.I. 2014-0560421I7 - FX losses on CFA wind-up

s. 40(3.6) not specifically ousted on s. 88(3) winding-up – but no affiliation after disposition

In 2014-0538591I7, the Directorate indicated that s. 40(3.6) did not apply to deny a loss realized on the winding-up of a controlled foreign affiliate because (1) s. 69(5)(d) specifically ousts the application of s. 40(3.6) respecting property (the CFA's shares) disposed of on a winding-up, and (2) it is unlikely that under the foreign corporate law the CFA would be considered to still exist immediately after that disposition.

In this follow-up letter, the Directorate acknowledged that the first point was wrong, as s. 88(3) by its terms "operates notwithstanding subsection 69(5)," so that s. 69(5) could not, in turn, operate to "cause subsection 40(3.6)...to not apply to the shares of the CFA disposed of by the shareholder on the winding-up."

In confirming the second point, it stated:

[W]e continue to question how the CFA could be affiliated with the shareholder immediately after the shareholder's disposition of the CFA shares (a requirement for the application of subsection 40(3.6)). We would expect that, under the foreign corporate law, the CFA would cease to exist and its shares would simultaneously be cancelled when the CFA was wound-up.

10 October 2014 APFF Roundtable, 2014-0538241C6 F - 75(2) and definition of "earned income" in 146(1)

basis adjustment for denied capital loss (otherwise subject to s. 75(2) attribution) at trust level

X, who is the sole beneficiary of a protective trust, holds voting shares of a corporation giving him control thereof, with the trust holding retractable shares (previously gifted to it by X) having a nominal paid-up capital and an adjusted cost base equal to their redemption amount. On its retraction of its shares, a deemed dividend is attributed to X under s. 75(2) and its capital loss is deemed to be nil under s. 40(3.6)(a). Is the capital loss as computed before the application of s. 40(3.6) attributed to X or to the protective trust, and is it added to the ACB of the trust's or X's shares – and would the answers change if all the shares were held by the trust? CRA responded (TaxInterpretations translation):

...A loss which is deemed to be nil by virtue of paragraph 40(3.6)(a) is not attributable to anyone. … Assuming that after the redemption of the shares…held by the asset-protection trust, the trust continuously still holds at least one share…, the amount of the loss must be added in the calculation of the adjusted cost base of a share…held by the asset-protection trust immediately after the disposition… . In effect, the taxpayer subject to subsection 40(3.6) is the...trust.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 146 - Subsection 146(1) - Earned Income	character preservation of s. 75(2) attributed income	122
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2)	character preservation of attributed income/basis adjustment for denied capital loss at trust level	446

15 August 2014 Internal T.I. 2014-0538591I7 - FX losses on CFA wind-up

s. 40(3.6) does not apply to winding-up

A Canadian-resident corporation did not elect under s. 88(3.1) for the winding-up of its wholly-owned controlled foreign affiliate (CFA) to be a qualifying liquidation and dissolution. After noting that 2012-0436921I7 [immediately below] dealt with a share redemption rather than winding-up situation and in finding that s. 40(3.6) would not apply, CRA stated:

Where a disposition of the shares is…on account of the winding-up of the CFA and where property of the CFA had been appropriated by the shareholder during the taxation year of the CFA, then paragraph 69(5)(d)…[provides] that subsection 40(3.6)… does not apply in respect of any property (which would include the shares) disposed of on the winding-up. Furthermore…we question how the CFA could be affiliated with the taxpayer immediately after the disposition as we would expect that, under the foreign corporate law, the CFA would cease to exist and its shares would simultaneously be cancelled when the CFA was wound-up.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 93 - Subsection 93(2.01)	no reduction under s. 93(2.01)(a) if no exempt dividend	132

23 April 2012 Internal T.I. 2012-0436921I7 - Capital Losses

s. 40(3.6) denied s. 39(2) loss on share redemption

The Canadian parent's shares of a US subsidiary were redeemed, and it claimed a capital loss under s. 39(2). CRA found that s. 40(3.6) and s. 84(9) first applied to deem the capital loss to be nil, so that no loss could be claimed under s. 39(2):

It has been the CRA's long-standing position that section 40 of the Act will determine whether or not a taxpayer has "made a gain" or "sustained a loss" as a result of the disposition of a property. It is only after a gain or loss has been determined under the provisions of section 40 that one looks to section 39 to compute the capital gain or capital loss.

Furthermore, the Canadian parent would not receive any basis for the denied loss unless it retained shares of the US subsidiary:

Although Parent's loss on the redemption of the Shares is deemed to be nil under paragraph 40(3.6)(a) of the Act, Parent may, pursuant to paragraph 40(3.6)(b), have been entitled to increase the adjusted cost base of any other shares of U.S. Subsidiary that it owned immediately after the redemption of the Shares. However, if Parent did not directly own any other shares of U.S. Subsidiary immediately after the redemption of the Shares, paragraph 40(3.6)(b) would not apply to add the denied loss to the adjusted cost base of any remaining issued and outstanding shares of U.S. Subsidiary. Furthermore, there is no provision in the Act that would permit Parent to increase the adjusted cost base, by the amount of the loss previously denied under paragraph 40(3.6)(a), of the shares of U.S. Subsidiary that Parent acquired on September 28, 2007.

9 January 2012 External T.I. 2011-0427461E5 F - Attribution Rules and Suspended Loss Rules

stop-loss rule in s, 40(3.6) gave ACB addition to common shares of transferee spouse who redeemed preferred shares gifted to him by spouse

Ms. A and her spouse, Mr. B, each held 50% of the common shares of Opco, with Ms. A also holding Opco preferred shares with a paid-up capital ("PUC") of $200, a redemption value and fair market value (“FMV”) of $2,000,000, and an adjusted cost base ("ACB") of $1,000,000. Ms. A transferred to Mr. B, for no consideration, ½ of her preferred shares, thereby realizing under s. 73(1) proceeds of disposition deemed to be equal to the ACB of those shares of $500,000. Five years later, Opco redeemed those preferred shares for their FMV of $1,000,000.

Would Mr. B's capital loss on the redemption be attributed to Ms. A under s. 74.2(1)(b) or would it instead be added to the ACB of Mr. B’s Opco common shares pursuant to s. 40(3.6)(b). CRA responded:

[T]he loss of $499,900 ("Denied Loss") sustained by Mr. B … would be deemed to be nil by virtue of paragraph 40(3.6)(a). Consequently, no amount of the Denied Loss could be attributed to Ms. A under subsection 74.2(1) … .

By virtue of paragraph 40(3.6)(b), the amount of the Denied Loss … could, however, be added to … the ACB, to Mr. B, of each of the common shares of … Opco that is owned by him immediately following the disposition of such preferred shares of the capital stock of Opco. In this regard, we have assumed that subsection 112(3) would not apply in the particular situation.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 74.2 - Subsection 74.2(1)	stop-loss rule in s, 40(3.6) trumped s. 74.2(1) so that denied capital loss was added to transferee spouse’s common share ACB	278

31 August 2005 Internal T.I. 2005-0134831I7 F - Capital Gains Exemption Strip

individuals holding high-ACB/low-PUC prefs and low ACB/PUC common shares preserved that ACB under s. 40(3.6)(b) for surplus-stripping purposes on their prefs’ redemption

S. 84.1 did not apply to individuals transferring preferred shares – whose ACB previously had been stepped up by them under s. 110.6(2.1) - to common shares under s. 40(3.6)(b) (upon the redemption of those preferred shares in their hands), with those common shares then exchanged by them for inter alia high-PUC preferred shares of new Holdcos, which were then redeemed in their hands for cash. The Directorate indicated that although s. 84.1 did not “technically” apply to these transactions, transactions such as these would be referred to the GAAR Committee.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 84.1 - Subsection 84.1(1) - Paragraph 84.1(1)(a)	s. 84.1 did not apply to transferring crystallized preferred shares’ ACB to common shares under s. 40(3.6)(b), with those shares exchanged for high-PUC prefs of new Holdcos for cash redemption	565
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4)	the use of s. 40(3.6)(b) for surplus-stripping purposes would be referred to the GAAR Committee	122

16 January 2003 External T.I. 2002-0151025 - Subsection 40(3.6)

Where an estate of the deceased acquires a controlling bloc of shares of a corporation that was controlled by the deceased and the shares are then redeemed, s. 40(3.6) will not apply because the two executors are not affiliated persons and no single executor/trustee has de facto control of the corporation.

29 March 2001 External T.I. 2001-0074145 - Affiliated persons & stop loss rules

Where the shares of a corporation are owned equally by four trusts having the same corporate trustee, s. 40(3.6) will apply to deny a capital loss arising on the redemption of the shares of one of the trusts. There is no specific provision like ss.256(4) and (5) that would prevent the trust and the corporation from being affiliated after their redemption by virtue of the control by the same trustee.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c)		70

13 October 2000 Internal T.I. 2000-0031107 - Post Martem Estate Planning

"Subsection 40(3.6) will not generally apply where all the shares of a corporation held by an estate are disposed of to the corporation which, immediately following a disposition is controlled by the legal representative of the estate in his personal capacity, unless, immediately after the disposition the corporation is controlled, directly or indirectly in any manner whatever (as defined in subsection 256(5.1)) by the estate. "We assumed that you share our views that the demand promissory note issued as consideration would not result in the Estate having factual control ... ."

Articles

Steve Suarez, Pooja Samtani, "Using Exchangeable Shares in Inbound Canadian Transactions", 2007, 48:13, Tax Notes Int'l 1281 (The authors describe an "exchangeable share" as "a share of a Canadian corporation... that, together with some ancillary rights, replicates as closely as possible the economics (and to some extent the legal rights engaged by holders) of a share of another corporation.")

Kevin Wark, "Corporate-Owned Insurance: Revisiting Share Redemption Arrangements", CALU Report, August 2004.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 112 - Subsection 112(3.2)		0

Subsection 40(3.61) - Exception — estate loss carried back

Administrative Policy

2021 Ruling 2021-0895631R3 - Post-mortem planning - Hybrid Pipeline

no stop-loss for s. 164(6) loss realized by estate before pipeline transactions

Preliminary transactions to pipeline transactions entailed the subject corporation (a portfolio investments company) using its CDA account (which had been increased through the receipt of life insurance proceeds on the life of A) to pay a capital dividend to the estate of A, thereby reducing the FMV of the estate’s shares.

Then:

The estate transferred all its shares of the corporation to Newco in consideration for four notes maturing 3, 6, 9 and 12 months after the amalgamation below (and in consideration for voting common shares of Newco, with an election filed under s. 85(1),) - and with the resulting capital loss (which was not denied under ss. 40(3.61) and (3.6)) being carried back under s. 164(6).
Newco will be amalgamated with the corporation (presumably after a year) and the notes will thereafter commence to be repaid consistently with their maturity dates.

The usual pipeline rulings were give (re ss. 84.1, 84(2) and 245(2).)

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(2)	2-year pipeline transactions	226

26 November 2020 STEP Roundtable Q. 5, 2020-0847181C6 - Subsections 40(3.61) and 164(6)

ss. 40(3.61) and (3.6), and 164(6), not applied iteratively to eliminate a s. 164(6) loss carryback where the estate also realized a small capital gain

On the death of the taxpayer, he realized a $4.9 million capital gain under s. 70(5) on his common shares of PrivateCo. Capital gains were also realized on his investment portfolio both prior to the date of death - and between the date of death and December 31 of $30,000. A portion of the common shares of PrivateCo are redeemed, resulting in a capital loss of $1 million in the estate. Applying the approach advanced in 2012-0449801C6 and 2012-0462941C6, the $30,000 of capital gains realized by the estate in its first taxation year would grind the capital loss available for purposes of the s. 164(6) election. The grind effected by the interaction of ss. 40(3.61) and (3.6) and the netting of the estate’s capital gains and capital losses in s. 164(6)(a) would continue to occur in an iterative manner, so that the estate’s $1 million capital loss would ultimately be reduced to nil. Does CRA agree?

CRA responded:

The CRA has reconsidered its earlier view and notes that an iterative grind of the estate’s capital loss would yield a result which is contrary to the purpose of the relief provided by subsection 40(3.61). … The CRA is [now] of the view that pursuant to subsection 40(3.61):

the subsection 164(6) election applies first, and the capital loss available for the election is determined without reference to subsection 40(3.4) or 40(3.6), and

the stop loss rules in subsections 40(3.4) or 40(3.6) apply to any capital loss of the estate that is not the subject of the subsection 164(6) election.

… Paragraph 164(6)(a) limits the amount of the election to the net amount of the estate’s capital losses and capital gains, or $970,000. Assuming the legal representative elects on this amount, the $970,000 amount will be deemed to be a capital loss of the deceased taxpayer for the deceased taxpayer’s last taxation year (terminal T1 return) and $30,000 of the estate’s capital loss will remain in the estate. Accordingly, the relieving measure in subsection 40(3.61) preserves the estate’s capital loss that can be applied to the deceased taxpayer’s terminal T1 return. Subsection 40(3.6) would apply to …the remaining capital loss of $30,000 [which] would be deemed to be nil.

In summary, the estate would be taxed on its $30,000 of capital gains because the capital loss that remains in the estate after the election is nil and, in accordance with paragraph 40(3.6)(b), would be added to the adjusted cost base of the common shares of PrivateCo held by the estate after the disposition. A similar result would occur where the estate makes the subsection 164(6) election for an amount that is less than the result of the paragraph 164(6)(a) calculation (for example, if the estate elected for less than $970,000).

… [T]he relief provided by subsection 40(3.61) is only in respect of a disposition of a share … .

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 164 - Subsection 164(6) - Paragraph 164(6)(a)	s. 164(6)(a) applied before s. 40(3.61) so as to avoid iterative grind of s. 164(6) carryback amount	276

2019 Ruling 2019-0822951R3 F - Post-mortem Hybrid Pipeline

s. 164(6) carryback of capital loss coupled with dividend to generate dividend refund

Preliminarily to pipeline transactions, the CCPC that had been held by the deceased (ACo) will purchase for cancellation (in consideration for issuing a demand promissory note) a sufficient such number of its Class A common shares to result in a refund of its eligible refundable dividend tax on hand, or its non-eligible refundable dividend tax on hand, balances. The executors will carry back the resulting capital loss under s. 164(6), with s. 40(3.61) thereby precluding the application of the s. 40(3.6) stop loss rule.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(2)	pipeline transaction for marketable securities company that includes full use of the ERDTOH/NERDTOH balances and s. 164(6) carryback	438

11 October 2013 APFF Roundtable, 2013-0493651C6 F - Affiliated persons and de facto control

exception unavailable for inter vivos trust

All the voting common shares of Opco (carrying on an active business) are held by a discretionary inter vivos trust which was settled by the uncle of the four beneficiaries (the "children"), and its non-voting retractable preferred shares (which were issued on an estate freeze and have a value approximating 50% of the value of Opco) are held by a spousal testamentary trust, of which the four children are the beneficiaries upon the death of the surviving spouse (i.e., their mother), and of which their father was the testator).

If the testamentary trust redeemed its preferred shares for a note, would it be affiliated with Opco following such retraction?

CRA noted that it would be a question of fact as to whether the holding of the debt by the testamentary trust resulted in de facto control of Opco (as described in s. 256(5.1)). In such event, the exception in s. 40(3.61) would not prevent the application of the stop-loss rule in s. 40(3.6) "given that the testamentary trust is not an estate."

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 256 - Subsection 256(5.1)	holding of relatively large note where debtor has a iliquid business could give rise to de facto control	260

Subsection 40(4) - Disposal of principal residence to spouse or trust for spouse

Administrative Policy

5 November 2014 External T.I. 2014-0521891E5 F - Résidence principale et copropriété

overview of s. 40(4) rule

Two common-law spouses ("A" and "B") purchased a condominium as their principal residence (the "Residence"). A's will provided that the Residence would be devised to B.

After noting that, subject to conditions, s. 70(5) provided that the deemed proceeds to A would equal the ACB to A of the Residence, unless an election was made for there to be FMV proceeds, CRA then stated:

Some special rules exist to calculate the principal residence exemption where a "principal residence" is devised to the spouse or common-law partner and the deemed proceeds of disposition for A are equal to the adjusted cost base. Under these special rules, B would be deemed to have owned the Residence throughout the period during which A was the owner and the Residence would be deemed to have been the "principal residence" of B for any taxation year for which the Residence was the "principal residence" of A.

Locations of other summaries		Wordcount
Tax Topics - General Concepts - Ownership	whether a tacit co-ownership agreement is respected is a private law issue	126

S1-F3-C2 - Principal Residence

Example re transfer to spousal trust

2.71 ...

Example 9

Mr. X was the sole owner of a house in Canada, which he had acquired in 1995. In 2000, Mr. X got married and his spouse, Mrs. X, moved into the house with him. In 2005, Mr. X died and the house was transferred to a spousal trust for Mrs. X. The trust was a trust as described in subsection 70(6). The trust’s tax year-end was December 31. If Mr. X had not died (and if he had sold his house in 2005), he could have designated it as his principal residence for any of the years 1995 to 2005 inclusive.

Under the rollover rule in subsection 70(6), Mr. X was deemed to have disposed of the house immediately before his death for proceeds equal to his cost of the house. Thus, Mr. X had no gain or loss on the deemed disposition of the house. The spousal trust for Mrs. X was deemed under subsection 70(6) to have acquired the house, at the time of Mr. X’s death, at a cost equal to Mr. X’s deemed proceeds, that is, at Mr. X’s cost of the house.

In 2011, Mrs. X died and the trust sold the house at fair market value. Since this amount was greater than the trust’s deemed cost of the house, the trust had a gain otherwise determined from the disposition, which the trust (that is, its trustee) wishes to eliminate by using the principal residence exemption.

Subsection 40(4) deems the trust to have owned the house in all the years in which Mr. X owned it, that is, 1995 to 2005 inclusive, in accordance with the rule described in ¶2.70(a) above. (The house was, of course, owned by the trust in 2005 in any event.) This means that the years that the trust must include in variable C in the principal residence exemption formula in ¶2.17 - 2.26 are 1995 to 2011 inclusive.

Since the trust is a personal trust resident in Canada and also since Mrs. X lived in the house and qualified as a specified beneficiary of the trust for the years 2005 to 2011 inclusive, the trust can designate the house as its principal residence for those years. The trust cannot designate the house as its principal residence for the years 1995 to 2004 inclusive; however, such a designation by the trust is not necessary – the house is already deemed by subsection 40(4) to have been the trust’s principal residence for those years, in accordance with the rule described in ¶2.70(b) above, because Mr. X could have designated the house as his principal residence for those years. Also, in accordance with the rule described in ¶2.70(c) above, the trust is deemed to have been resident in Canada for the years 1995 to 2004 because Mr. X was resident in Canada during those years. Therefore, the trust is able to include all of the years from 1995 to 2011 inclusive in variable B in the formula in ¶2.17 - 2.26. In other words, the trust is able to use the principal residence exemption to completely eliminate the gain otherwise determined on its disposition of the house in 2011.

Locations of other summaries		Wordcount
Tax Topics - General Concepts - Ownership		259
Tax Topics - Income Tax Act - Section 54 - Principal Residence		403
Tax Topics - Income Tax Regulations - Regulation 2301		172
Tax Topics - Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(b)		308
Tax Topics - Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(c)		410
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(b)		187
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e)		187
Tax Topics - Income Tax Act - Section 40 - Subsection 40(7)		397
Tax Topics - Income Tax Act - Section 220 - Subsection 220(3.21) - Paragraph 220(3.21)(a)		110
Tax Topics - Income Tax Act - Section 40 - Subsection 40(6.1)	simple example of application of transitional rule	168

30 May 2007 External T.I. 2006-0200271E5 F - Bien agricole et résidence principale

s. 45(3) election did not extend time that farm house was a principal residence, once the occupant went to nursing home

The correspondent’s mother died and, in her will, left all her property to her children, including a farm, on which there was a residence which she had occupied together with her husband, and after his death as well until she moved into a nursing home (at which point, the home was not occupied). She became the sole owner of the farm on his death (until then, it had been held under community of property), and they had been actively engaged in its operation for more than five years. She made an election to keep her home as her residence, citing s. 45(3). The residence was not used to earn income at any time. In the course of a general discussion, CRA stated:

Generally, subsection 40(4) provides that where a taxpayer has, after 1971, disposed of property to an individual in circumstances where, inter alia, subsection 70(6) is applicable, certain rules apply for the purpose of calculating the individual's gain from the disposition of the property pursuant to paragraph 40(2)(b) or (c), as the case may be. Paragraph 40(4)(a) deems the individual to have owned the property throughout the period during which the taxpayer owned it. Subparagraph 40(4)(b)(i) deems the property to have been the individual's principal residence for a taxation year for which it would have been the taxpayer's principal residence if the taxpayer had designated it as the taxpayer’s principal residence.

Thus, your mother could designate the residence as a principal residence for all the years for which your father could have designated the residence as his principal residence.

… [Y]our mother did not ordinarily inhabit the residence during the years XXXXXXXXXX to XXXXXXXXXX. Consequently, the residence cannot be her principal residence during those years.

Regarding the s. 45(3) election, CRA stated:

[S]ince the facts do not show that there was a change of use, that election could not be made. Furthermore, no other election would have allowed your mother to designate her residence as her principal residence for the years XXXXXXXXXX to XXXXXXXXXX.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 45 - Subsection 45(3)	no change of use when occupant of residence moved into a nursing home	131
Tax Topics - Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(1.3) - Paragraph 110.6(1.3)(c)	principally references over 50% of use	52

24 April 2006 External T.I. 2006-0166041E5 F - Transfert de biens entre époux séparés

s. 40(4) feeds principal residence claim of spouse after she acquires the co-ownership interest of her separated husband for $1

In 1991, the spouses jointly purchased an immovable ("Immovable1" located in Canada which was intended to serve as their principal residence upon their return to Canada. Their separation in 1992 did not constitute a judicial separation and was not effected pursuant to a written separation agreement. Upon their return to Canada, the wife bought a house in 1992 ("Immovable2") which immediately became her principal residence, but remained as a co-owner of Immovable1. The husband became a co-owner of Immovable2 in order to assist her in securing a mortgage, but did not make any monetary disbursements, nor live there. Immovable1 has been the husband's principal residence since May 1995;

Between the time of the purchase of Immovable1 and May 1995, Immovable1 was used to earn rental income. The wife has never lived in Immovable1.

Each of the spouses now wishes to sell his or her undivided share of the immovables to the other spouse for $1. CRA assumed that the wife will designate Immovable2 as her principal residence for the years 1995 to 2006 inclusive (as well as 1992, 1993, and 1994) and that, as a result, the husband must designate the same property for the years 1995 to 2006 – in which case, Immovable1 would be treated as a capital property subject to the change-in-use rules.

CRA indicated that the transfer of the husband’s interest in Immovable2 to your wife will be at the adjusted cost base of the interest and that, under s. 40(4), that interest will be deemed to have been owned by the wife for the entire period during which it was owned by the husband (1992 to the present). Thus, when the wife disposes of Immovable2, she will be able to benefit from the principal residence exemption for all the years during which Immovable2 was her principal residence in order to minimize or even eliminate any taxable capital gain

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 74.5 - Subsection 74.5(3)	separation judgment unnecessary for s. 74.5(3) election to avoid attribution	290

1 September 1995 External T.I. 9507695 - PRINCIPAL RESIDENCE PROVISIONS

Where a transfer of a home has occurred as described in s. 70(6), the surviving spouse will not automatically lose her entitlement to designate another property as her principal residence as a result of s. 40(4)(b)(i).

14 July 1994 External T.I. 9405025 - GAIN ON PROPERTY TRANSFERRED FROM SPOUSE

Re application of ss.40(4) and (6) where a husband and wife jointly owned a cottage on December 31, 1971, husband in 1973 transferred his interest in the cottage to her, in 1978 she transferred the cottage back to husband, husband and wife then separated, in 1991 husband transferred the cottage to his new wife, in 1993 she transferred the cottage to the husband, and the husband transferred the cottage to his former wife in final settlement of rights arising out of their marriage, and the former wife sold the cottage in 1993 to a third party purchaser. RC confirmed that the first wife's gain from the disposition of the cottage in 1993 for the purposes of s. 40(2) is to be determined from December 31, 1971, assuming that husband designates the property as his principal residence and does so in prescribed form and manner pursuant to the definition of principal residence.

23 June 1992 T.I. 920894 (December 1992 Access Letter, p. 13, ¶C38-248)

Discussion of the availability of the principal residence exemption in various situations where a married couple own a house and a cottage continuously from 1971 to 1991.

If no transfer of either property occurred prior to death with the result that one spouse died holding both properties in joint ownership, the surviving spouse upon an eventual sale could only designate one property as a principal residence and would lose the benefit of s. 40(6).

7 March 1992 T.I. (Tax Window, No. 17, p. 7, ¶1786)

Re application of s. 40(4) and (6) where two properties each of which meet the definition of principal residence are owned in joint tenancy by husband and wife and the husband predeceases his wife.

Paragraph 40(4)(b)

Subparagraph 40(4)(b)(i)

Administrative Policy

30 September 2010 Internal T.I. 2010-0373901I7 F - Bigamie fiscale - transfert de biens au décès

application of s. 40(4)(b)(i) by both surviving spouse re House A and surviving common-law partner re House B – but not for overlapping years

The taxpayer lived with his spouse in Immovables A, but thereafter commenced to live separate and apart from her, but did not divorce from her, and instead lived in a conjugal relationship with another (a common-law partner) in Immovable B until his death. On his death, Immovable A and Immovable B were devised on a s. 70(6)(a) rollover basis to his spouse and common-law partner, respectively, who thereafter ordinarily inhabited the respective Immovable until its sale.

On such the subsequent sale of Immovables A and B by the spouse and common-law partner, will the spouse and common-law partner be able to designate their property as their principal residence on the assumption that they will have, respectively, ordinarily inhabited their respective immovables throughout the period during which the taxpayer owned them and thereafter until the time of the sale?

Respecting the spouse, the Directorate noted that she could designate Immovable A as her principal residence for the pre-death period, as could the common-law partner, but went on to state:

If during [that period], the taxpayer had a spouse (with whom he was living separate and apart) and a common-law partner, only one of the two properties could have been designated as the taxpayer's principal residence for each of the taxation years in that period and have been deemed to be the principal residence of either the spouse or the common-law partner under subparagraph 40(4)(b)(i).

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) - Paragraph 70(6)(a)	s. 70(6)(a) could apply simultaneously to the devise of House A to surviving spouse and of House B to surviving common-law partner	103

Subsection 40(6.1)

Administrative Policy

S1-F3-C2 - Principal Residence

simple example of application of transitional rule

Example 7.1

Personal Trust C is a family trust, the beneficiaries of which are Mr. C, his spouse and their two children who were specified beneficiaries of the trust and who ordinarily occupied a house since its acquisition by the trust in 2011 for $300,000. Personal Trust C sold the house in 2017 for $450,000.

As the trust does not fall into any of the categories in (c.1)(iii.1) of the principal residence exemption, Personal Trust C cannot designate the house as its principal residence for any year after 2016. The house’s fair market value was $400,000 on December 31, 2016.

The trust’s gain is determined under the formula to be $50,000 determined as follows:

Under A of the formula, the full gain up to December 31, 2016 is reduced to nil under s. 40(2)(b).
The gain recognized in 2017 is $50,000 under B of the formula.
There is no decrease from December 31, 2016 to the sale date under C of the formula

Locations of other summaries		Wordcount
Tax Topics - General Concepts - Ownership		259
Tax Topics - Income Tax Act - Section 54 - Principal Residence		403
Tax Topics - Income Tax Regulations - Regulation 2301		172
Tax Topics - Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(b)		308
Tax Topics - Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(c)		410
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(b)		187
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e)		187
Tax Topics - Income Tax Act - Section 40 - Subsection 40(7)		397
Tax Topics - Income Tax Act - Section 40 - Subsection 40(4)		550
Tax Topics - Income Tax Act - Section 220 - Subsection 220(3.21) - Paragraph 220(3.21)(a)		110

16 June 2017 External T.I. 2017-0698181E5 - New principal residence rules & trusts

s. 40(6.1) protected trust gain that accrued up to December 31, 2016

The estate of Deceased Parent, that qualified as a graduated rate estate (GRE) with a fiscal period of July 1, 2016 to June 30, 2017, sold the principal residence of the Deceased Parent in 2017 during that fiscal period at a gain. The adult son lived in the home during 2017 before the sale and was a specified beneficiary of the GRE as described in the principal residence definition. The correspondent suggested that the new limitation in s. (c.1)(iii) of the principal residence definition did not apply in this situation since the disposition did not occur in a taxation year that began after 2016, so that the GRE could designate the residence as a principal residence for its July 1, 2016 to June 30, 2017 taxation year. CRA responded:

[T]he GRE:

1. would not be, in its first taxation year after 2016, a trust described in proposed subparagraph (c.1)(iii.1) of the definition principal residence in section 54;

2. owned the property on December 31, 2016;

3. disposed of the property after 2016;

4. first disposed of the property after 2016; and

5. owned the property continuously from the beginning of 2017 until the disposition.

Given that new subsection 40(6.1) would therefore apply to the GRE described above, we do not agree with your interpretation. …[T]he transitional relief offered by proposed subsection 40(6.1) would be applicable in the scenario presented to any portion of the … gain that accrued up to December 31, 2016. Any portion of the gain that accrued after that date would not be eligible to be sheltered by the principal residence exemption and would be taxable.

Subsection 40(7) - Property in satisfaction of interest in trust

Administrative Policy

S1-F3-C2 - Principal Residence

Example re distribution of residence

2.67 ...

Example 8

A personal trust acquired a residential property on October 1, 2007 for $200,000. On January 10, 2009, the property was distributed to Mr. X in satisfaction of his capital interest in the trust. Subsection 107(4) did not apply with respect to this distribution, and the rollover provision in subsection 107(2) prevented the gain on the property accrued to January 10, 2009 from being taxed in the hands of the trust. Instead, the potential for taxing that gain was transferred to Mr. X because subsection 107(2) deemed him to have acquired the property at a cost equal to $200,000, that is, the cost amount of the property to the trust. Mr. X lived in the residence from October 15, 2007 until he disposed of the property on December 1, 2011 for $250,000, incurring no costs in connection with the disposition.

Mr. X’s gain otherwise determined on the disposition of the property was equal to his $250,000 proceeds minus his $200,000 adjusted cost base, for a gain of $50,000. Subsection 40(7) deemed him to have owned the property from October 1, 2007 rather than from January 10, 2009. Since Mr. X ordinarily inhabited the residence in all of the years from 2007 to 2011 inclusive (that is, all of the years in which he either owned the property or was deemed to have owned it), he was able to designate the property as his principal residence for all those years. Thus, he was able to use the principal residence exemption to fully eliminate his $50,000 gain otherwise determined. However, if neither Mr. X nor his current or former spouse or common-law partner, or child had ordinarily inhabited the residence (see the rule discussed in ¶ 2.10 - 2.12) until it was distributed by the trust to Mr. X on January 10, 2009, he would have been able to designate the property as his principal residence only for 2009 to 2011. In other words, he would have been able to use the formula in ¶2.17 - 2.26 to eliminate only the following portion of his $50,000 gain otherwise determined:

Applying the formula A × (B ÷ C):

A is $50,000

B is 1 + 3 (being tax years 2009 to 2011)

C is 5 (being tax years 2007 to 2011)

= $50,000 x (4 ÷ 5)

= 40,000

Locations of other summaries		Wordcount
Tax Topics - General Concepts - Ownership		259
Tax Topics - Income Tax Act - Section 54 - Principal Residence		403
Tax Topics - Income Tax Regulations - Regulation 2301		172
Tax Topics - Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(b)		308
Tax Topics - Income Tax Act - Section 45 - Subsection 45(1) - Paragraph 45(1)(c)		410
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(b)		187
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7) - Paragraph 13(7)(e)		187
Tax Topics - Income Tax Act - Section 40 - Subsection 40(4)		550
Tax Topics - Income Tax Act - Section 220 - Subsection 220(3.21) - Paragraph 220(3.21)(a)		110
Tax Topics - Income Tax Act - Section 40 - Subsection 40(6.1)	simple example of application of transitional rule	168

89 C.R. - Q.25

The principle residence exemption is not available to a non-spouse trust on the disposition of a residential unit, regardless whether or not any of the beneficiaries occupied the unit.

Subsection 40(10)

Administrative Policy

7 October 2016 APFF Roundtable Q. 17, 2016-0652781C6 F - Functional currency and acquisition of control

exclusion of pre-transition debts

CRA noted that where a taxpayer with an elected functional currency (e.g., the USD) has an accrued FX loss on a debt obligation owing in another foreign currency (e.g., the euro), an s. 111(4)(e) election made following an acquisition of control of the taxpayer will not affect the FX gain which would be realized under s. 261(10) re a pre-transition debt, so that it is only changes in the euro/USD exchange rate occurring from the beginning of the taxpayer’s first "functional currency year" up to the acquisition of control that would be subject to ss. 111(4) and (12). In response to the question as to whether, if an s. 111(4)(e) election is made, do ss. 40(10) and (11) apply, CRA stated:

As such an election cannot be made in respect of the portion of the foreign exchange gain realizable by virtue of subsection 261(10), subsections 40(10) and (11) will not apply.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 111 - Subsection 111(4) - Paragraph 111(4)(e)	FX gains or losses on pre-transition debts not affected	229
Tax Topics - Income Tax Act - Section 261 - Subsection 261(9) - Paragraph 261(9)(a)	exclusion of pre-transition debts from s. 111(4)	98

Subsection 40(11)

Articles

Carrie Smit, "Foreign Currency Debts and Acquisitions of Control: Beware the Unexpected Gain", International Tax (Wolters Kluwer CCH), February 2017, No. 9, p. 6

If a restructuring of USD debt (with an accrued FX loss) of a Canadian debtor entails an acquisition of control of the debtor before the debt is settled for a payment of, say, 20% of the USD amount owing, then an unsheltered capital gain under s. 40(11) very well may arise. In concept, on the debt settlement, s. 40(11) will deem the debtor to realize a capital gain to match the FX capital loss previously realized on the USD debt under s. 111(12) on the AoC (except that this capital gain will be reduce somewhat by the3 FX loss actually realized on the 20% repayment). However, the s. 111(12) loss would not be available to be carried forward to offset the s. 30(11) gain.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 111 - Subsection 111(12)		495

Subsection 40(12) - Donated flow-through shares

Administrative Policy

19 January 2018 External T.I. 2017-0683501E5 - Flow-Through Shares

non-flow through shares can be part of a flow-through share class

A taxpayer subscribes cash for a publicly listed common share (the “Share”) of a resource company, and donates it to a qualified donee. Although the Share is not a “flow-through share,” it is included in a “flow-through share class of property.” How does s. 40(12) apply? CRA responded:

A “flow-through share class of property,” is defined in section 54 of the Act and generally means a group of properties comprised of all shares of a class if any share of the class is at any time a flow-through share to any person. …

[T]he exemption threshold of a taxpayer at a particular time in respect of a particular flow-through share class of property is a pool of the actual cost to the taxpayer of flow-through shares issued to the taxpayer on or after the taxpayer’s “fresh-start date” (as defined in section 54 of the Act), less prior capital gains of the taxpayer from the disposition of shares of the class. ...

[I]t may be possible for the taxpayer to own a share (as capital property) that is included in a flow-through share class of property without ever having owned a flow-through share (or a right to acquire a flow-through share) by virtue of another person owning a flow-through share of that class. However, it is necessary for the taxpayer to have acquired a flow-through share (or certain partnership interests …) in order for a taxpayer to have an exemption threshold in respect of a flow-through share class of property to which subsection 40(12) of the Act would apply. Accordingly, where a taxpayer has no exemption threshold … with respect to a flow-through share class of property, the deemed capital gain from a disposition of a capital property included in that flow-through share class of property referred to in subsection 40(12) would likely be zero … .

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 54 - Exemption Threshold	taxpayer with no flow-through shares has no exemption threshold	194
Tax Topics - Income Tax Act - Section 38.1	general paraphrase	316

16 October 2012 External T.I. 2012-0437911E5 - Donation of flow-through shares

The taxpayer had acquired units in two flow-through share partnerships. Approximately two years after the offerings, the LPs would transfer their flow-through shares to a mutual fund corporation (MFC), presumably under s. 85(2), and the LPs would wind-up and distribute the flow-through shares to the taxpayer and other investors, presumably under s. 85(3). Alternatively, the LPs might simply wind-up (presumably under s. 98(3)) and distribute the flow-through shares to the former limited partners including the taxpayer.

In response to a query as to the consequences of a donation of the MFC shares or the flow-through shares, as the case may be, following such windings-up, CRA provided a general discussion, and stated that

It is a question of fact whether the special rules in section 38.1 of the Act apply in a particular situation.

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 38.1		148

14 May 2012 External T.I. 2011-0426631E5 - Donation of Flow-through Shares

CRA was asked to consider transactions in which a limited partnership holding flow-through shares transferred those shares to a mutual fund corporation in consideration for shares of the mutual fund corporation (presumably, under s. 85(2)), those shares (the "MFC shares") were distributed to the limited partners on the winding-up of the partnerships (presumably under s. 85(3)), and the MFC shares were donated by the former partners.

CRA noted that if s. 38.1(b) applies, the taxpayer is deemed to to have a new exemption theshold for the MFC shares, and then stated that "it is a question of fact whether the special rules in section 38.1...will apply in a particular situation."

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 38.1		112

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4)	using the CDA and negative ACB rules to generate “over-integration” was abusive	594
Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (a)	contrary to purpose of the capital dividend rules to fully exempt a capital gains distribution	300
Tax Topics - Income Tax Act - Section 123.3	no CRA challenge to continuance to BVI to avoid s. 123.3 tax	96

Locations of other summaries		Wordcount
Tax Topics - Income Tax Act - Section 39 - Subsection 39(2)	s. 39(2) historically applied only to FX gains or losses on liabilities and foreign currency dispositions	275
Tax Topics - General Concepts - Stare Decisis	statement not obiter if it is an essential part of the Court’s reasoning	185
Tax Topics - Statutory Interpretation - Prior Cases	presumption that Parliament enacts with a knowledge of the jurisprudence	93

You are here

Section 40

Table of Contents

Subsection 40(1) - General rules

Cases

Abrametz v. Canada, 2009 DTC 5828, 2009 FCA 111

Administrative Policy

Paragraph 40(1)(a)

Administrative Policy

Subparagraph 40(1)(a)(i)

Cases

Martin v. Canada, 2015 FCA 204

Gaynor v. The Queen, 91 DTC 5288, [1991] 1 CTC 470 (FCA)

The Queen v. Demers, 86 DTC 6411, [1986] 2 CTC 321 (FCA)

See Also

Giguère v. Agence du revenu du Québec, 2018 QCCQ 874

Rio Tinto Alcan Inc. v. The Queen, 2016 TCC 172, aff'd 2018 FCA 124

Brosamler Estate v. The Queen, 2012 DTC 1193 [at 3493], 2012 TCC 204 (Informal Procedure)

Dubois c. La Reine, 2007 DTC 1534, 2007 TCC 461 (Informal Procedure)

Avis Immobilièn G.M.B.H. v. The Queen, 94 DTC 1039, [1994] 1 CTC 2204 (TCC)

Capcount Trading v. Evans, [1993] BTC 3 (C.A.)

Campbellton Enterprises Ltd. v. MNR, 90 DTC 1869, [1990] 2 CTC 2413 (TCC)

Samson Estate v. MNR, 90 DTC 1150, [1990] 1 CTC 2223 (TCC)

Bentley v. Pike, [1981] T.R. 17 (HCJ.)

Administrative Policy

9 June 2003 Internal T.I. 2003-001330

26 January 1993 Memorandum (Tax Window, No. 28, p. 15, ¶2399)

91 CR - Q.29

18 November 1991 Memorandum (Tax Window, No. 11, p. 19, ¶1537)

89 C.M.TC - "Leasing Costs"

Subparagraph 40(1)(a)(iii)

Cases

Pineo v. The Queen, 86 DTC 6322, [1986] 2 CTC 71 (FCTD)

The Queen v. Derbecker, 84 DTC 6549, [1984] CTC 606 (FCA)

Neder v. The Queen, 82 DTC 6022, [1981] CTC 501 (FCA)

See Also

Alguire v. The Queen, 95 DTC 532 (TCC)

Administrative Policy

93 C.R. - Q. 41

10 October 1991 T.I. (Tax Window, No. 11, p. 14, ¶1515)

21 August 1991 T.I. (Tax Window, No. 8, p. 6, ¶1403)

14 February 1991 T.I. (Tax Window, Prelim. No. 3, p. 12, ¶1119)

IT-236R2 "Reserves - Dispositions of Capital Property"

IT-436R "Reserves - Where Promissory Notes are Included in Disposal Proceeds"

Articles

Smith, "Corporate Restructuring Issues: Public Corporations", 1990 Corporate Management Tax Conference Report, pp. 6:6-6:8: discussion of claiming of reserve by vendor under a take-over bid.

Paragraph 40(1)(b)

Administrative Policy

Subsection 40(2) - Limitations

Paragraph 40(2)(a)

Subparagraph 40(2)(a)(ii)

Administrative Policy

Paragraph 40(2)(b)

Cases

Cassidy v. Canada, 2011 FCA 271

The Queen v. Joyner, 88 DTC 6459, [1988] 2 CTC 280 (FCTD)

The Queen v. Yates, 83 DTC 5158, [1983] CTC 105 (FCTD), aff'd 86 DTC 6296 [1986] 2 CTC 46 (FCA)

See Also

Francoeur v. Agence du revenu du Québec, 2016 QCCQ 11906

Cassidy v. The Queen, 2010 DTC 1336 [at 4287], 2010 TCC 471

Administrative Policy

16 February 1995 Mississauga Breakfast Seminar, Q. 4

88 C.R. - Q.55

80 C.R. - Q.24

Paragraph 40(2)(c)

Administrative Policy

Paragraph 40(2)(e)

See Also

Plant National Ltd. v. MNR, 89 DTC 401 (TCC)

Administrative Policy

12 May 1992 Memorandum 921006 (May 1993 Access Letter, p. 194, ¶C38-156)

25 March 1991 T.I. (Tax Window, No. 1, p. 7, ¶1170)

10 January 1990 T.I. (June 1990 Access Letter, ¶1257)

86 C.R. - Q.22

Paragraph 40(2)(e.1)

Administrative Policy

Current structure

Proposed transactions

Rulings

Articles