Presentation Material - McCarthy Tétrault

560600/422632
MT DOCS 11864055v1G
24
Chris Falk
Stefanie Morand
McCarthy Tétrault LLP
subsection 40(3.6) is considered. In the authors’ view, it is not self-evident that the combination
of subsections 40(3.6), 40(3.61) and 164(6) requires an iterative reading of the provisions (i.e., a
reading which seems absurd even without regard to context and purpose). Rather, given the
provisions of subsection 40(3.61), even without regard to context and purpose, the provisions
are arguably intended to be read with subsection 164(6) determining the carry-back and
subsection 40(3.6) denying the portion of the loss that is not carried back (the “Alternative
Reading”).
Having regard to the context and purpose of subsections 40(3.61) and 164(6), the authors are
of the view that:
• the iterative reading clearly leads to an absurd result;
• in interpreting the provisions, it should be assumed that the absurd result was not
intended unless no other reading is possible;
• another reading (i.e., the Alternative Reading) is possible and should be preferred since
it better gives effect to context and purpose.
Extent of the Issue
The authors do not agree with the CRA’s statement that the incidence of the circularity issue is
“likely quite limited” if the iterative reading applied.
Further, in the authors’ view, the reasons given by the CRA in support of this statement suggest
that the CRA’s assessment of the prevalence of the issue may be based on an incomplete
understanding of the issue. More particularly, the authors note as follows:
• Reason 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).”
Comment: As noted above, it is immaterial whether the estate realizes
“significant” gains. The concern is that given the drafting of the provisions, even
a nominal gain may preclude the estate from carrying back any amount pursuant
to subsection 164(6) if the provisions are interpreted iteratively.
• Reason 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.”
Comment: In many cases, estate assets must be liquidated in order to fund
estate expenses or to comply with instructions set out by the testator.
Furthermore, a tax-deferred rollover pursuant to subsection 107(2) is generally
not available in respect of distributions to beneficiaries who are not resident in
Canada for purposes of the Act.
• Reason 3. “Given 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.”