1991 Canadian Tax Foundation Conference
QUESTION 22
Subsection 164(6) provides that where the legal representative of a deceased taxpayer has disposed of capital property of the estate within the first taxation year of the estate, and the capital losses of the estate exceed the capital gains, the legal representative may elect to have those losses deemed to be losses of the deceased taxpayer for the year of death. Subsection 85(4) deems a loss on the disposition of shares by a taxpayer to be nil where immediately after the disposition the taxpayer or another person as specified in that subsection controlled the corporation to which the shares are transferred.
(a) In view of the wording "notwithstanding any other provision of this Act, the following rules apply" immediately preceding paragraph 164(6)(c), if only some of the shares owned by an estate are disposed of so that the estate continued to control the corporation, would subsection 85(4) apply to deny any loss which might otherwise be realized upon redemption or purchase for cancellation of the shares or would paragraph 164(6)(c) override?
(b)If all of the shares held by the estate are disposed of to the corporation but the legal representative in a personal capacity continues to control the corporation by virtue of a beneficial ownership of controlling shares, would the loss realized by the estate be deemed to be nil by virtue of subsection 85(4)?
DEPARTMENT'S POSITION
(a) In the situation described, subsection 85(4) would apply to deem the loss to be nil. 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 deemed to be nil as a result of the
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application of subsection 85(4) of the Act, it is our view that there is no capital loss to which the rules set out in subsection 164(6) of the Act are applicable. In this regard, the phrase "notwithstanding any other provision of this Act" occurs after paragraph (a) of subsection 164(6) of the Act and, in our view, it governs only the rules stipulated in paragraphs (c), (d), (e) and (f) of that subsection; it does not override subsection 85(4) or any similar provision of the Act for purposes of determining whether a capital loss has been incurred.
(b) With respect to this second scenario, it is our view that subsection 85(4) of the Act will not generally apply unless the corporation is, immediately after the disposition of its shares by the estate, controlled, directly or indirectly in any manner whatever, by the estate. The expression controlled directly or indirectly in any manner whatever has the meaning assigned by subsection 256(5.1) of the Act.
Prepared by Simon Leung
October 18, 1991.000144