Presentation Material - McCarthy Tétrault

Chris Falk
Stefanie Morand
McCarthy Tétrault LLP
• if the provisions are to be interpreted iteratively, the CRA’s suspicion that the incidence
of the circularity issue is “likely quite limited” is incorrect and, as discussed below, may
be based on an incomplete understanding of the issue.
Subsections 40(3.6) and (3.61)
Where a taxpayer disposes a corporation’s shares to that corporation, the taxpayer’s loss is
generally deemed to be nil pursuant to the provisions of subsection 40(3.6) if the corporation is
“affiliated” 59 with the taxpayer immediately after the disposition.
However, subsection 40(3.6) is subject to subsection 40(3.61). Subsection 40(3.61) provides
that where an election is made under subsection 164(6) to treat all or any portion of an estate’s
capital loss (determined without reference to subsections 40(3.4) and (3.6)) from the disposition
of a share as a capital loss of the deceased taxpayer, subsections 40(3.4) and (3.6) will apply to
the estate only to the extent that the amount of the capital loss exceeds the loss to which the
election applies. 60
The purpose of subsection 40(3.61) is to provide relief from subsections 40(3.4) and (3.6) in the
context of subsection 164(6) capital loss-carry back planning. As stated in the December 2004
Technical Notes:
Section 40 provides rules for determining a taxpayer's gain or loss from the disposition of a
property. The Act contains a number of rules that defer recognition of a loss in certain
circumstances, such as the rules set out in subsections 40(3.4) and (3.6). In broad terms these
defer a taxpayer's loss where, despite a disposition by the taxpayer, the loss property remains
within—or an identical property is acquired by—the population of persons who are affiliated with
the taxpayer.
Proposed amendments to subsection 251.1(1), concerning when a person is affiliated with a
trust, could in some typical estate and post-mortem arrangements cause these loss-deferral
rules to apply. For example, an individual who is the majority interest beneficiary of the estate of
a deceased taxpayer will be affiliated with the estate under the proposed amendments, as would
be the estate and a corporation controlled by that individual. As a result, a loss arising, for
instance, from a redemption by the corporation of a share held by the estate would be deemed
to be nil by subsection 40(3.6). This would include a loss arising in the course of administering
the estate that would otherwise be capable of being carried back under subsection 164(6). That
subsection allows a deceased taxpayer's legal representative to elect to treat certain losses of
the taxpayer's estate for its first taxation year as losses of the taxpayer for the taxpayer's last
taxation year.
New subsection 40(3.61) will ensure that subsections 40(3.4) and (3.6) do not apply to any
portion of an estate's capital loss carried back under subsection 164(6). (emphasis added)
Interaction of Subsections 40(3.6), 40(3.61) and 164(6) – the “Circularity” Issue
As discussed in more detail in the Moraitis/Kakkar Article, if subsections 40(3.6), 40(3.61) and
164(6) are applied iteratively, the realization by the estate of any capital gain in the estate’s first
59
60
Section 251.1.
Subsection 40(3.4) is another stop-loss rule which may apply to defer the recognition of a capital loss sustained
by a corporation, trust or partnership in circumstances where the transferred property (or property identical to
such property) is acquired by the transferor or a person affiliated with the transferor within a specified period.
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