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Chris Falk Stefanie Morand <strong>McCarthy</strong> Tétrault LLP 2012 STEP Conference At the 2012 STEP Conference, the CRA was asked whether it would administratively ignore subsections 40(3.6) and (3.61) when determining the net capital loss for purposes of subsection 164(6). The specific question posed to the CRA and the CRA’s response were as follows: QUESTION 5 There can be an issue when an estate elects under subsection 164(6) to apply a capital loss to the terminal return of the deceased. It is possible to create “circularity” under 164(6), when an estate carries back a loss but then realizes a capital gain on other assets in its first taxation year. See Nick Moraitis and Manu Kakkar's Taxfind article "Potential Circularity Problem with Estate Loss Carryback" published by the CTF. How would CRA interpret 164(6) in such circumstances Would you administratively ignore subsections 40(3.6) and 40(3.61) when determining the net capital loss for purposes of 164(6) CRA Response […] We have reviewed the article referred to in your question and agree, based on a technical reading of the above provisions, that it is possible for a circularity issue to arise. If the estate realizes capital gains during its first taxation year, those gains must be applied against the loss on the share disposition, in accordance with the requirements of subsection 164(6), in order to determine the amount that can be carried back. Where this occurs, the application of subsection 40(3.61) will result in an amount of loss stopped pursuant to subsection 40(3.6), which in turn will reduce the amount available for the subsection 164(6) election, and the circular nature of these provisions becomes an issue. To date, however, the Income Tax Rulings Directorate has not been informed of an actual case in which this issue has arisen. We suspect that the incidence of this potential circularity issue is likely quite limited, for a number of reasons: 1. One would expect that typically, estates should not realize significant gains in their first taxation years, as assets acquired at the time of death would generally be acquired at fair market value pursuant to subsection 70(5). 2. The ability to distribute assets of the estate to its beneficiaries on a rollover basis pursuant to subsection 107(2), where applicable, would avoid the generation of gains in the estate in respect of such asset dispositions. 3. Given that the issue was identified in the above-referenced article, many practitioners are no doubt aware of it and are ensuring that capital gains are deferred beyond the first taxation year of the estate. We would appreciate if any of your members encounter such an example, that it be provided to CRA, so that we can review the issue further on a case-by-case basis. 560600/422632 MT DOCS 11864055v1G 22
Chris Falk Stefanie Morand <strong>McCarthy</strong> Tétrault LLP Statutory Interpretation The principles governing the interpretation of tax statutes have been considered in a number of decisions of the Supreme Court of Canada. 62 In Canada Trustco, the Court summarized the approach to statutory interpretation as follows (at paragraph 10): It has been long established as a matter of statutory interpretation that “the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament”: see 65302 British Columbia Ltd. v. Canada, 1999 CanLII 639 (S.C.C.), [1999] 3 S.C.R. 804, at para. 50. The interpretation of a statutory provision must be made according to a textual, contextual and purposive analysis to find a meaning that is harmonious with the Act as a whole. When the words of a provision are precise and unequivocal, the ordinary meaning of the words play a dominant role in the interpretive process. On the other hand, where the words can support more than one reasonable meaning, the ordinary meaning of the words plays a lesser role. The relative effects of ordinary meaning, context and purpose on the interpretive process may vary, but in all cases the court must seek to read the provisions of an Act as a harmonious whole. (emphasis added.) The Court added the caution that “[e]ven where the meaning of particular provisions may not appear to be ambiguous at first glance, statutory context and purpose may reveal or resolve latent ambiguities”. 63 More recently, in Placer Dome, 64 the Supreme Court of Canada affirmed the statements in Canada Trustco and provided the following guidance regarding the appropriate role of legislative purpose in statutory interpretation (at paragraphs 22 and 23): [W]here the words of a statute give rise to more than one reasonable interpretation, the ordinary meaning of words will play a lesser role, and greater recourse to the context and purpose of the Act may be necessary: Canada Trustco, at para. 10. Moreover, as McLachlin C.J. noted at para. 47, “[e]ven where the meaning of particular provisions may not appear to be ambiguous at first glance, statutory context and purpose may reveal or resolve latent ambiguities.” The Chief Justice went on to explain that in order to resolve explicit and latent ambiguities in taxation legislation, “the courts must undertake a unified textual, contextual and purposive approach to statutory interpretation”. The interpretive approach is thus informed by the level of precision and clarity with which a taxing provision is drafted. Where such a provision admits of no ambiguity in its meaning or in its application to the facts, it must simply be applied. Reference to purpose of the provision “cannot be used to create an unexpressed exception to clear language” […] Where, as in this case, the provision admits of more than one reasonable interpretation, greater emphasis must be placed on the context, scheme and purpose of the Act. Thus, legislative purpose may not be used to supplant clear statutory language, but to arrive at the most plausible interpretation of an ambiguous statutory provision. (emphasis added) The meaning of the text of subsection 40(3.61), even without regard to context and purpose, is uncertain. Subsection 40(3.61) clearly contemplates that subsection 164(6) applies before 62 63 64 See, for example, Antosko v. The Queen, 94 DTC 6314 (SCC); Canada Trustco, supra, note 28; and Placer Dome, infra, note 64. Supra, note 28, at para. 47. Placer Dome Canada Ltd. v. Ontario (Minister of Finance), 2006 DTC 6532 (SCC). 560600/422632 MT DOCS 11864055v1G 23
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