20 December 2001 External T.I. 2001-0106905 - INTERSPOUSAL TRANSFER OF LOSSES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether a taxpayer can effectively transfer capital losses to the taxpayer's spouse in a particular situation.

Position: Yes

Reasons: The application of the superficial loss rules can give rise to the result

XXXXXXXXXX 				2001-010690
M. Eisner, CA
December 20, 2001

Dear XXXXXXXXXX:

Re: Transfer of Capital Losses to Spouse

This is in reply to your letter of October 22, 2001, requesting our views on whether unrealized capital losses can be transferred between spouses. Included with your letter was a newspaper article which indicated that such a result could be achieved if certain steps were followed.

In the example provided in the article, one individual (the "Husband") has a certain number of shares of XYZ company (the "Old Shares") in respect of which he has unrealized capital losses of $15,000 while his spouse (the "Wife") has realized capital gains in excess of $15,000 with respect to the 1999 taxation year. The Old Shares, which are capital property to the Husband and have a fair market value of $5,000, cost the Husband $20,000. The Husband sells the Old Shares in an arm's length transaction on the open market for $5,000. Immediately following the sale of the Old Shares by the Husband, the Wife purchases for $5,000 on the open market the same number and type of XYZ shares (the "New Shares") that were sold by the Husband. The New Shares are identical to the Old Shares. A short time following the expiration of 30 days after the sale by the Husband, the Wife sells the New Shares in an arm's length transaction for their fair market value of $5,000.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by the Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out Information Circular 70-6R4. With respect to the above hypothetical scenario, we are providing the following comments which are general in nature. For purposes of this reply, we have assumed that the Wife purchased the New Shares with her own funds, such that the attribution rules would not apply to attribute the above capital loss back to the Husband. We have enclosed a copy of Interpretation Bulletin IT-511R "Interspousal and Certain Other Transfers and Loans of Property", which provides information on the attribution rules.

Subject to the superficial loss rules in section 54 of the Income Tax Act (the "Act") and the adjustment in paragraph 53(1)(f) of the Act (explained below), the adjusted cost base of the New Shares to the Wife would be the amount she paid; i.e., $5,000.

Section 54 of the Act defines a superficial loss as follows:

"superficial loss" of a taxpayer means the taxpayer's loss from the disposition of a particular property where

(a) during the period that begins 30 days before and ends 30 days after the disposition, the taxpayer or a person affiliated with the taxpayer acquires a property (in this definition referred to as the "substituted property") that is, or is identical to, the particular property, and

(b) at the end of that period, the taxpayer or a person affiliated with the taxpayer owns or had a right to acquire the substituted property,

except where the disposition was...

Therefore, in the above scenario, if at the end of 30 days after the sale by the Husband, either the Husband or the Wife (as spouses are affiliated persons pursuant to section 251.1 of the Act) still owns the Old Shares, identical shares (i.e., the New Shares), or the right to acquire the Old Shares or identical shares, the capital loss realized by the Husband on his sale of the Old Shares will be deemed a "superficial loss". Under paragraph 40(2)(g) of the Act, such a capital loss realized by the Husband on the arm's length sale of the Old Shares will, generally, be nil and the denied loss will be added to the adjusted cost base of the New Shares owned by the Wife pursuant to paragraph 53(1)(f) of the Act. As a result of the application of the superficial loss rules in the above scenario, the adjusted cost base of the New Shares to the Wife will be equal to the adjusted cost base of the Old Shares to the Husband immediately before the Old Shares were sold by him. Accordingly, when the Wife later sells the New Shares in the market, the capital loss realized ($15,000) will be the Wife's. As a result, the Husband will have effectively transferred his capital loss to the Wife.

It should be noted, however, that if the Wife sells the New Shares within 30 days of the Husband's sale and, at the end of the 30 day period, neither the Wife nor the Husband own, or have a right to acquire, the Old Shares or identical shares, the Husband's capital loss on the sale of the Old Shares will not be a superficial loss and will remain his. Assuming that the Wife sold the New Shares for the same price she paid ($5,000), her capital loss would be nil.

We trust that our comments are of assistance to you.

Yours truly,

Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch