Principal Issues: Does the GAAR apply to a series of transactions undertaken for the purpose of avoiding the application of subsection of 93(2.01) (or 93(2) as it formerly read) or 112(3) through the use of a second class of shares?
Position: Yes
Reasons: In the context of 93(2.01) (and 93(2) as it formerly read), subparagraph 93(2.01)(b)(ii) precisely specifies that only certain related gains realized by a taxpayer are intended to affect the computation of the amount of the loss to be denied on the disposition of FA shares. We infer that it would be contrary to policy to avoid the application of 93(2.01) (or 93(2) as it formerly read) to circumvent that provision in order to preserve capital losses to offset any other type of capital gains. The absence of an exception from 112(3) similar in nature to subparagraph 93(2.01)(b)(ii) could be viewed as being indicative of an intention to not have any gains have an effect on the computation of the amount of the loss to be denied on the disposition of non-FA shares.
National CTF Conference
November 24 - 26, 2013
Background
Subsection 93(2.01) (and 93(2) as it formerly read) is a loss denial rule, similar in nature to subsection 112(3), which would deny a loss on the disposition of a share of a foreign affiliate (an "FA") to the extent that the shareholder received deductible dividends on that share prior to the disposition.
Earlier this year at the International Fiscal Association ("IFA") Conference held in Montreal, you stated that because a foreign exchange gain realized on the repayment of a non-arm's-length debt is not a gain described in subparagraph 93(2.01)(b)(ii), it was not intended that such a gain should affect the computation of the amount of a loss to be denied under subsection 93(2) as it formerly read. You therefore concluded that in the context of a shareholder having an accrued foreign exchange loss on shares of an FA and an accrued foreign exchange gain on a related party debt used to acquire those shares, the acquisition of a separate class of the FA's shares and the payment of dividends thereon to preserve the loss on the original FA shares owned in order to offset the gain on the debt would result in an abuse having regard to subsection 93(2) as it formerly read, such that the GAAR would apply.
Question
Would your conclusion be different if the funds used to acquire the original FA shares had been borrowed from an arm's length party more than 30 days before the acquisition of the shares?
Furthermore, what are your views on whether the GAAR would apply to a series of transactions undertaken for the purpose of avoiding the application of subsection 112(3) through the use of a second class of shares, for example preferred shares?
CRA Response
Our conclusion would not be different. The IFA question was inspired by a request for an advance ruling which we were unable to grant as requested. During our consideration of that request, the GAAR Committee expressed its view that a Canco's acquisition of an FA's preferred shares was an avoidance transaction which would, when combined with the payment of exempt dividends thereon and the Canco's disposition of previously held common shares of the FA, result in the avoidance of subsection 93(2.01) (and 93(2) as it formerly read). The Committee is of this view even in circumstances when an otherwise denied loss on the Canco's disposition of FA's common shares would be a foreign exchange loss which could offset a foreign exchange gain on a related debt. The Committee is of this view unless the related debt is a debt described in subparagraph 93(2.01)(b)(ii), a provision which precisely specifies which gains are intended to have an effect on the computation of the amount of a loss to be denied on the disposition of FA shares. That provision includes the description of an arm's length foreign currency debt that was entered into within 30 days of the acquisition of the FA share, was incurred in relation to the acquisition of the FA share, and was settled resulting in a gain within 30 days of the disposition of the FA share. The example you described today did not satisfy the "entered into within 30 days of the acquisition of the FA share" requirement.
Although this view of the GAAR Committee is with respect to the disposition of shares of an FA, in our view, it would be difficult to arrive at a different conclusion in a subsection 112(3) context given that subsection 112(3) is a loss denial rule similar in nature to subsection 93(2.01) (and 93(2) as it formerly read). Furthermore, the absence of an exception from 112(3) similar in nature to subparagraph 93(2.01)(b)(ii) could be viewed as being indicative of an intention to not have any gains have an effect on the computation of the amount of the loss to be denied on the disposition of non-FA shares.
Lori Carruthers
2013-050816