X, who is the sole beneficiary of a protective trust, holds voting shares of a corporation giving him control thereof, with the trust holding retractable shares (previously gifted to it by X) having a nominal paid-up capital and an adjusted cost base equal to their redemption amount. On its retraction of its shares, a deemed dividend is attributed to X under s. 75(2) and its capital loss is deemed to be nil under s. 40(3.6)(a). Is the capital loss as computed before the application of s. 40(3.6) attributed to X or to the protective trust, and is it added to the ACB of the trust's or X's shares – and would the answers change if all the shares were held by the trust? CRA responded (TaxInterpretations translation):
...A loss which is deemed to be nil by virtue of paragraph 40(3.6)(a) is not attributable to anyone. … Assuming that after the redemption of the shares…held by the asset-protection trust, the trust continuously still holds at least one share…, the amount of the loss must be added in the calculation of the adjusted cost base of a share…held by the asset-protection trust immediately after the disposition… . In effect, the taxpayer subject to subsection 40(3.6) is the...trust.