5-903269
Dear Sirs:
Re: Interpretation Bulletin IT-239R2 Application of Paragraph 10
This is in reply to your letter of November 9, 1990 concerning the deductibility of a loss generated by paragraph 111(4)(d) of the Income Tax Act (the Act).
You describe a hypothetical situation where a Canadian corporation (Parentco) advances funds on a non-interest bearing basis to its wholly-owned subsidiary (Subco). Subsequently, there is an acquisition of control of Parentco. As the adjusted cost base of the debt will be in excess of the fair market value of the debt, Parentco shall be deemed to have a capital loss from the disposition of the debt pursuant to paragraph 111(4)(d) of the Act. The "stop-loss" rules in subparagraph 40(2)(g)(ii) of the Act would apply in respect of the deemed capital loss. However, it is your view that, on the basis of paragraph 10 of IT-239R2, a deduction for the deemed capital loss in the above circumstances will not be denied.
Our Views
Paragraph 10 of IT-239R2 applies in a situation where a shareholder sells his shares and also transfers to the purchaser, or settles his loan at less than face value. However, in your hypothetical situation the shareholder sells his shares of Parentco but he has not settled or transferred any loan. It is Parentco which has a loan receivable from Subco and Parentco has neither sold its shares of Subco nor, has it settled or transferred its loan. Consequently, paragraph 10 of IT-239R2 does not apply in your hypothetical situation.
We trust our comments will be of assistance to you.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch