25 September 2012 CTF Roundtable Q. 8, 2012-0457541C6 - 2012 BC CTF Q8 - Subsection 40(3.61)

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.

Principal Issues: The CTF has asked for CRA's comments on whether the relief afforded by subsection 40(3.61) should be extended to other trusts and as to the status of the CBA-CICA Joint Committee on Taxation 2005 submission to the Dep't of Finance on this issue.

Position: Not for CRA to comment.

Reasons: This is a tax policy question which is the purview of Dep't of Finance.

2012 BC CTF Tax Conference – September 25, 2012

CRA ROUNDTABLE

Question 8

Subsection 40(3.61) – Extension of relief to other trusts

Subsection 40(3.61) was enacted in 2005, effective for losses from dispositions that occur after March 22, 2004. The provision is intended to provide relief from the “stop-loss” rules in subsections 40(3.4) and (3.6) in the course of administering the estate of a deceased taxpayer where the taxpayer’s legal representative elects pursuant to subsection 164(6) to carry an unused capital loss realized in the estate’s first taxation year to the deceased taxpayer’s final taxation year.

In February, 2005, the CBA-CICA Joint Committee on Taxation made a submission to Finance regarding (then proposed) subsection 40(3.61). The Committee recommended that the relief provided by subsection 40(3.61) should be extended to other situations – for example, losses realized on dispositions of property bequeathed from a deceased taxpayer to a qualifying spouse trust, and situations involving alter ego trusts and joint spousal or common-law partner trusts. Such trusts are alternative and analogous vehicles for dealing with property on a taxpayer’s death – from a tax policy perspective, the same relief should apply to such losses whether they are incurred in the deceased taxpayer’s estate or in a spouse trust, alter ego trust or joint spousal trust in the first taxation year of the trust following the death.

Does CRA have any comments or further information to add in respect of the Committee’s submission and what the status is?

CRA Response

As was noted in our response to Roundtable Question 5 at the Canadian Tax Foundation Prairie Conference earlier this year, subsection 164(6) of the Act allows the estate of a deceased taxpayer to elect to have all or part of its capital losses (to the extent they exceed its capital gains) that are realized in its first taxation year to be deemed to be capital losses of the deceased. The election, which results in the carry back of the elected amount to the final return of the deceased, can be useful in addressing potential double taxation which may arise where the deceased held corporate shares with accrued gains at death.

Subsection 40(3.6) of the Act is a stop-loss rule that applies if a taxpayer disposes of a share of a corporation to the corporation, and the taxpayer is affiliated with the corporation immediately after the disposition. When subsection 40(3.6) applies, the taxpayer’s loss from the disposition is deemed to be nil. Prior to the introduction of subsection 40(3.61), if the estate and the corporation were affiliated immediately after the disposition (typically, on the redemption of the shares by the corporation), the capital loss would be stopped, and could not be carried back to be applied on the terminal return.

In general, subsection 40(3.61) was introduced to override the effect of the stop-loss rules in subsections 40(3.4) and (3.6) where an estate's capital loss is being carried back pursuant to subsection 164(6). Subsection 40(3.61), which applies if the estate elects pursuant to subsection 164(6) in respect of a capital loss on the disposition of a share of a corporation, provides that subsections 40(3.4) and (3.6) apply “in respect of the loss only to the extent that the amount of the loss exceeds the portion of the loss to which the election applies”.

We have reviewed the 2005 Joint Committee submission referred to in your question and would like to remind you that the Canada Revenue Agency is responsible for administering and enforcing the Act and the Income Tax Regulations as enacted by Parliament. Any proposed changes to tax policy or amendments to legislation, such as that suggested in the Joint Committee submission, are the purview of the Tax Policy Branch at the Department of Finance.

Phil Kohnen
2012-045754