Where a public corporation ("Parentco") holding shares of a public corporation ("Subco") with an accrued loss, sells the shares to a newly-incorporated subsidiary ("Newco") and Subco and Newco then merge within 30 days on a triangular amalgamation so that the minority shareholders of Subco become shareholders of Parentco, the capital loss otherwise realized by Parentco on the transfer of the shares will be denied by s. 40(3.4). The position of the taxpayer that “a share of the capital stock of a corporation that has been disposed of must first be held by an affiliated person at the end of the period ending 30 days after its disposition as non-depreciable capital property before the deemed ownership of a share of the capital stock of a corporation in paragraph 40(3.5)(c) can be considered” did not make sense. The Directorate stated:
[I]t is not only the word "apply" in paragraph 40(3.5)(c) that must be interpreted, nor just the expression "if subsections 40(3.3) and 40(3. 4) apply", but rather the broader expression "[f]or the purposes of subsections 40(3.3) and 40(3.4) ... where subsections 40(3.3) and 40(3.4) apply to the disposition by a transferor of a share of the capital stock of a corporation". In our view, this expression should be interpreted as meaning, "The following deeming rules apply for the purposes of subsections 40(3.3) and 40(3.4); ...where subsections 40(3.3) and 40(3.4) apply to the disposition by a transferor of a share of the capital stock of a corporation... ".