18 December 2000 External T.I. 2000-0041105 - WHAT IS A "VALID ELECTION"

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Whether the write down for accounting purposes (as was reflected on the financial statements attached to the corporate income tax return) constitutes a valid election for purposes of subsection 50(1) of the Act?

Position TAKEN:

No.

Reasons:

The fact that the taxpayer wrote down the carrying value of its investment for accounting purposes would generally not, in and by itself, constitute a valid election for purposes of subsection 50(1) of the Act. We also note that subsection 50(1) of the Act did not become a prescribed provision for purposes of subsection 220(3.2) of the Act until publication in the Canada Gazette on October 27, 1997.

XXXXXXXXXX 	2000-004110
		Jim Wilson
Attention:  XXXXXXXXXX 

December 18, 2000

Dear Sir\Madam:

Re: Subsection 50(1) of the Income Tax Act ("Act")

We are writing in reply to your letter of July 31, 2000 wherein you requested our comments regarding the application of the above-noted provision. You have described a situation where a corporate taxpayer sustained a loss on an investment in shares of a private corporation which had, in 1996, become a bankrupt for purposes of subsection 128(1) of the Act. The taxpayer did not report the capital loss on its 1996 corporate tax return and it did not file a formal election (i.e. it did not attach a letter to its 1996 corporate income tax return) to have subsection 50(1) of the Act apply. However, for accounting purposes, the taxpayer did write down and reflect as a loss the carrying value of this investment in its financial statements which accompanied and formed an integral part of its 1996 corporate income tax return. The taxpayer had never had occasion until recently to claim this loss. You wish to know whether the write down for accounting purposes (as was reflected on the financial statements attached to the corporate income tax return) constitutes a valid election for purposes of subsection 50(1) of the Act.

Our Comments

The fact that the taxpayer wrote down the carrying value of its investment for accounting purposes would generally not, in and by itself, constitute a valid election for purposes of subsection 50(1) of the Act. We also note that subsection 50(1) of the Act did not become a prescribed provision for purposes of subsection 220(3.2) of the Act until publication in the Canada Gazette on October 27, 1997.

However, it should be noted that, notwithstanding subsection 50(1) of the Act, it is a question of fact as to the timing of the disposition of shares. For example, generally, the dissolution of a corporation will cause a disposition, within the meaning of that term in section 54 of the Act, of shares by the shareholders. To establish whether or not there is a disposition of shares in a particular case at a particular time, all the facts of the case and the applicable statutes of the incorporating jurisdiction must be examined.

We trust our comments will be of some assistance.

Yours truly,

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

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