Principal Issues: [TaxInterpretations translation]
(1) To whom is the deemed disposition under paragraph 128.1(4)(b) made?
(2) If a capital loss results from the deemed disposition under paragraph 128.1(4)(b), can the taxpayer deduct a business investment loss in the taxpayer’s return of income for the taxation year in which the taxpayer leaves Canada?
Position:
(1) The taxpayer is deemed to have disposed of a property owned by the taxpayer at the time of the disposition and is deemed to have reacquired it at the particular time.
(2) No.
Reasons:
(1) Interpretation of paragraphs 128.1(4)(b) and (c) of the Act.
(2) The conditions set out in subparagraph 39(1)(c)(i) or (ii) of the Act are not satisfied.
XXXXXXXXXX Danielle Bouffard
2005-011810
November 17, 2005
Dear Sir,
Subject: Request for technical interpretation:
Paragraph 128.1(4)(b) of the Income Tax Act (the "Act")
This is in response to your email of February 23, 2005, requesting our opinion on the above subject. We apologize for the delay in responding to this request.
Facts
A taxpayer owned shares of a small business corporation (SBC) with a fair market value that was less than their adjusted cost base. The taxpayer ceased to be resident in Canada at a particular time and the shares were subject to the rules in subsection 128.1(4). As a result of the application of paragraph 128.1(4)(b), a capital loss resulted from the deemed disposition of the SBC shares. The taxpayer would have incurred a business investment loss (BIL) if the shares had been disposed of to a person with whom the taxpayer was dealing at arm's length.
Questions
1. To whom is the deemed disposition under paragraph 128.1(4)(b) made?
2. Can the taxpayer deduct a BIL on the taxpayer’s return of income for the taxation year of departure from Canada?
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (CRA) not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may not, however, apply to your particular situation in certain circumstances.
Paragraph 39(1)(c) provides that a capital loss sustained by a taxpayer may constitute a BIL if it arises from a disposition of any property to which subsection 50(1) applies or to a person with whom the taxpayer was dealing at arm's length.
Taking into account the wording of paragraphs 128.1(4)(b) and 128.1(4)(c), we are of the view that a capital loss resulting from the application of paragraph 128.1(4)(b) is not a capital loss resulting from the disposition of a property to a person with whom the taxpayer was dealing at arm's length. Therefore, this capital loss could not become a BIL since the conditions in subparagraph 39(1)(c)(i) or (ii) are not satisfied.
These comments are not advance income tax rulings and do not bind the CRA with respect to any particular factual situation.
Best regards,
Alain Godin
For the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch