Principal Issues: An inter-vivos trust owns all of the issued and outstanding voting and participating shares of the capital stock of Opco. The trust's beneficiaries are X, X's issue and another trust. X owns all of the issued and outstanding non-voting and participating shares of the capital stock of Opco. X's spouse owns all of the issued and outstanding shares of the capital stock of Lossco, the fair market value of which is lower than X's spouse's adjusted cost base. X's spouse wants to sell his shares of the capital stock of Lossco to Opco. Whether the loss of X's spouse could be treated as a superficial loss.
Position: Yes.
Reasons: X's spouse could be affiliated with Opco under three scenarios: 1) If X's spouse has de facto control over Opco, 2) If X has de facto control over Opco or 3) If X and the inter-vivos trust constitute an affiliated group of persons that has de facto control over Opco.
XXXXXXXXXX 2009-033050 J. Lafrenière (613) 941-2956 August 4, 2010
Subject: Request for Technical Interpretation - Definition of "affiliated persons" by virtue of section 251.1.
Dear Sir,
This is in response to your July 3, 2009 fax in which you asked us for clarification regarding the definition of "affiliated persons" in section 251.1 of the Income Tax Act (the "Act") in a particular situation.
Unless otherwise indicated, any reference in this document to a section of the Act or one of its components is a reference to a section of the Act or one of its components.
It appears to us that the situation described in your fax and summarized below could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its opinion. However, we can offer the following general comments that may be helpful. It should be noted that the application of one or more provisions of the Act generally requires an analysis of all the facts relating to a particular situation. As a result, and given that your fax only provides a very brief description of a hypothetical situation, the comments below may not apply in full in a particular situation.
1) The Particular Situation
You have presented us with the situation described below (the "Particular Situation") as part of your request for a technical interpretation:
(a) Opco is a Canadian-controlled private corporation incorporated under Part IA of the Companies Act (Québec), R.S.Q., c. I-3;
(b) the issued and paid-up shares of the capital stock of Opco includes Class A shares, being voting and participating shares, and Class B shares, being non-voting and participating shares;
(c) all of the issued and outstanding Class A shares of the capital stock of Opco are held by a trust whose beneficiaries are X, X's issue and another trust. The allocation of the income and capital of the trust is at the sole discretion of the trustee, an unrelated third party;
(d) all of the issued and outstanding Class B shares of the capital stock of Opco are held by X.
Furthermore, in a telephone conversation with one of our representatives (XXXXXXXXXX/Gladu), you provided us with the following additional information:
(a) Lossco is a Canadian-controlled private corporation;
(b) all of the issued and outstanding shares of the capital stock of Lossco are held by X's spouse. We have assumed that the shares of the capital stock of Lossco held by X's spouse as capital property;
(c) The fair market value ("FMV") of the issued and outstanding shares of the capital stock of Lossco held by X's spouse are less than their adjusted cost base;
(d) X's spouse wishes to sell X’s shares of the capital stock of Lossco to Opco for consideration equal to the FMV of the shares of the capital stock of Lossco sold. As a result, X's spouse would realize a capital loss on the disposition of the shares of Lossco equal to the difference between the adjusted cost base of the shares sold and the FMV of the shares sold.
2) Your Question regarding the Particular Situation
Would the capital loss realized by Mr. X be a superficial loss?
3) Our Comments regarding the File
The concept of superficial loss is defined in section 54. It means
“the taxpayer’s loss from the disposition of a particular property where
(a) during the period that begins 30 days before and ends 30 days after the disposition, the taxpayer or a person affiliated with the taxpayer acquires a property (in this definition referred to as the “substituted property”) that is, or is identical to, the particular property, and
(b) at the end of that period, the taxpayer or a person affiliated with the taxpayer owns or had a right to acquire the substituted property”
Subparagraph 40(2)(g)(i) provides that a taxpayer's loss from the disposition of a property is nil to the extent that it is a superficial loss.
Furthermore, paragraph 53(1)(f) provides that there shall be added to the cost of replacement property the amount, if any, by which the amount of the loss that was, because of the acquisition by the taxpayer of the property, a superficial loss of any taxpayer from a disposition of a property exceeds where the property disposed of was a share of the capital stock of a corporation, the amount that would, but for paragraph 40(2)(g), be deducted under subsection 112(3), 112(3.1) or 112(3.2) in computing the loss of any taxpayer in respect of the disposition of the share.
Thus, X's spouse would incur a superficial loss if he were affiliated with Opco.
However, according to the brief facts submitted to us, the spouse of X and Opco could be affiliated persons under three scenarios:
1. by virtue of subparagraph 251.1(1)(b)(i), if X's spouse is found to have de facto control of Opco. Note that under subsection 251.1(3) "controlled" means controlled directly or indirectly in any manner whatever. Thus, for the purposes of the affiliated person rules, both de jure and de facto control must be considered;
2. by virtue of subparagraph 251.1(1)(b)(iii), if X has de facto control of Opco. X and X’s spouse are affiliated persons under paragraph 251.1(1)(a) and, therefore, the spouse is affiliated with Opco.
3. by virtue of subparagraph 251.1(1)(b)(iii), if it were determined that X and the trust constitute an affiliated group of persons having de facto control of Opco.
Subparagraph 251.1(1)(g)(i) provides that a person is affiliated with a trust if that person is a majority-interest beneficiary of the trust.
By virtue of the definitions in subsection 251.1(3), a majority-interest beneficiary of a trust means a person whose interest, if any, as a beneficiary at that time in the income or capital of the trust has, together with the interests as a beneficiary in the income or capital of the trust of all persons with whom the person is affiliated, has a fair market value that is greater than 50% of the fair market value of all the interests as a beneficiary in the income or capital of the trust.
Subparagraph 251.1(4)(d)(i) provides that, in determining whether a person is affiliated with a trust, if the amount of income or capital of the trust that a person may receive as a beneficiary under the trust depends on the exercise by any person of, or the failure by any person to exercise, a discretionary power, that person is deemed to have fully exercised, or to have failed to exercise, the power, as the case may be.
Consequently, X forms an "affiliated group of persons" with the trust (within the meaning assigned by subsection 251.1(3)).
Furthermore, X and her spouse are affiliated persons under paragraph 251.1(1)(a).
In the event that X and the trust have de facto control of Opco, X's spouse would be affiliated with Opco pursuant to subparagraph 251.1(1)(b)(iii), since he is X's spouse and X is one of the members of an affiliated group of persons that controls Opco by virtue of subparagraph 251.1(1)(b)(ii).
We apologize for the delay in responding to your request. We hope that our comments will be of assistance.
Best regards,
Stéphane Prud'Homme, Notary, M. Fisc.
Manager
Mergers and Acquisitions Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.