Dear Sirs:
24(1)
Re: Advance Income Tax Ruling Request
We are writing to acknowledge your letter of January 31, 1991 wherein you advised that you wish to withdraw the above-noted request for an advance income tax ruling which was outlined in your letter of January 7, 1991. Accordingly, we have now closed our file on this matter.
In your letter of January 31, 1991 you also requested our interpretation of the provisions of subsection 85(4) of the Income Tax Act (the "Act") in connection with the provisions of subsection 164(6) of the Act, particularly in view of the phrase "notwithstanding any other provision of this Act" as it appears in subsection 164(6) of the Act. You asked that we use the situation outlined in your letter of January 7, 1991 as an example for our comments.
As stated in paragraph 21 of Information Circular IC-70-6R2, it is not our practice to comment with respect to actual proposed transactions or seriously contemplated transactions, except in the form of an advance ruling. However, we are prepared to offer the following general comments on the provisions of subsections 85(4) and 164(6) of the Act, as well as the interaction of these provisions.
Generally, subsection 85(4) of the Act operates, among other things,
(i) to deny the capital loss that would otherwise be incurred by a taxpayer who transfers capital property to a corporation; and
(ii) to provide for an addition to the cost base to the taxpayer of the shares of the transferee corporation owned by the taxpayer immediately after the transfer. if the transferee corporation was, immediately after the transfer, controlled, directly or indirectly in any manner whatever, by the taxpayer, by the spouse of the taxpayer or by a person or group of persons by whom the taxpayer was controlled, directly or indirectly in any manner whatever.
Therefore, subsection 85(4) of the Act would normally apply in a situation where a particular shareholder incurs a capital loss as a result of a disposition of his shares of a corporation to the corporation and, immediately after the disposition, the particular shareholder controls the corporation.
The provisions of subsection 164(6) of the Act operate, inter alia, to deem the capital loss from a disposition of property by the estate of a deceased taxpayer, where the disposition occurs within the first taxation year of the estate, to be that of the deceased taxpayer for the taxation year in which he died and not to be a capital loss of the estate, provided that the deceased taxpayer's legal representative files an election in prescribed manner and within a prescribed time as described in section 1000 of the Income Tax Regulations.
In order for subsection 164(6) of the Act to be applicable, there must be a capital loss or a terminal loss as determined under subsection 20(16) of the Act. If a capital loss has been incurred, but is reduced to nil as a result of the application of any of paragraphs 40(2)(e), (f) or (g) or subsection 85(4) of the Act, it is our view that there is no capital loss to which the rules set out in paragraphs (c), (e) and (f) of subsection 164(6) of the Act are applicable. In this regard, it is our view that the phrase "notwithstanding any other provision of this Act" as used in the mid-amble of subsection-164(6) of the Act governs only the rules stipulated in paragraphs (c), (d), (e) and (f) of that subsection; it does not mean that subsection 85(4) or similar provisions do not apply for purposes of determining whether a capital loss has been incurred.
We trust our comments will be of assistance.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch