Section 47

A CCPC (Aco) applied the $800 forgiven amount from the forgiveness of an $800 commercial debt obligation owing to a third party to reduce, pursuant to s. 80(10), the ACB of a $1,000 advance (the first advance) owing to it by a corporation (Bco) of which it was a specified shareholder, from $1,000 to $200. A year later, Aco made a further advance of $1,800 (the second advance) to Beco, bringing the total advance to $2,800 with a total ACB of $2,000. Beco then repaid $1,500 of the total advance.

In determining the capital gain on the repayment, would a FIFO approach be applied to the two advances treated as separate properties so that all of the first advance and $500 of the second advance would be treated as repaid? Or would the total advance be treated as a single property?

After noting an assumption that changes in the principal amount of advances did not result in their novation under the governing Quebec law, CRA indicated that, assuming that the total advance constituted a single property of Aco (a question of law and fact), it would be reasonable to consider that the ACB to Aco attributable to the repaid portion of $1,500 would be $1,071.42 ($2,000 × $1,500 / $2,800), so that Aco would therefore realize a capital gain of $428.58 on the partial repayment.

Regarding whether the two advances were identical properties, CRA indicated that this would turn on an examination of their terms, but taking into account that, as per s. 248(12), their differing principal amounts did not matter to this determination. If they were indeed identical properties, the same pro rata gain on each advance would be realized on the repayment for a total capital gain of $428.58 (the same as above), irrespective of whether the debtor applied the repayment to the first advance or the second.

If they were not identical, there would be an $800 gain from the repayment on the first advance and none on the second, if the debtor applied the repayment first to the first advance. If the debtor instead first applied the repayment to the second advance, there would be no capital gain.

The issued and outstanding shares of two classes of shares of a QBCA corporation have identical attributes except that the 100 Class A shares and 100 Class B shares have aggregate issued and paid-up capital of $100,000 and $100, respectively. Are they identical for s. 47 purposes? CRA responded:

[T]he issued and paid-up share capital attributable to a class of issued and outstanding shares of the capital stock of a corporation is an attribute of that class. …

In the example submitted, the CRA would not consider a Class A share … to be identical to a Class B share … . Indeed, the issued and paid-up share capital of a Class A share of the capital stock of the particular corporation would be $1,000, while the issued and paid-up share capital of a Class B share of the capital stock of the particular corporation would be $1.

Under s. 49 of the new Québec Business Corporations Act, it is possible to create classes and series of shares with exactly the same rights and restrictions. Those classes or series have their own issued and paid-up share capital accounts by virtue of the QBCA. Will a taxpayer who owns shares of each class with exactly the same rights and restrictions be required to average the two classes in determining the taxpayer’s adjusted cost base? CRA responded:

For purposes of calculating adjusted cost base and subsection 47(1), the CRA would consider shares of different classes with exactly the same rights and restrictions to be identical properties even though they are of different classes of shares. …

The question would therefore be whether, depending on the facts and circumstances of a particular situation, shares of different classes have exactly the same rights and restrictions. Among the rights that would require consideration in determining the differences, would be the right to the issued and paid-up capital respecting a share of one class as compared to that for another class.

"... We would consider a short sale entered into in order to hedge a taxpayer's position with respect to identical shares held on capital account to be a short sale that is on capital account. Additionally, if a taxpayer is eligible to make an election under subsection 39(4) and does so, the gain or loss on a 'short sale' of shares that are Canadian securities would be on account of capital. If the shares sold in a short sale transaction are capital property subsection 47(1) would apply to determine the taxpayer's cost of the shares sold at both ends of a short sale transaction if the shares acquired by the taxpayer under the terms of the short sale are otherwise identical to previously acquired shares held by the taxpayer. As a result, a gain or loss may arise on the sale of the borrowed shares as well as on the sale of the shares acquired for re-delivery to the lender."

Specific numerical example illustrating the identical property provisions and the specific identification position described in Income Tax Technical News, No. 19.

An exchangeable share and a share of the U.S. parent are not identical properties.

Discussion of inter-relationships between ss.7(1.3) and 47(1).

In order to avoid averaging with the low ACB of shares currently held by them that are subject to an escrow agreement, employees of a public corporation transfer unexercised employee stock options to revocable trusts. Under the terms of each trust a registered charity is entitled in specified circumstances to receive a pecuniary bequest and the employee (and his estate) is otherwise the sole beneficiary, and the sole trustee. If the trust subsequently exercises the options, it borrows funds needed to pay the exercise price from the employee.

RC ruled that the trust and the employees will be separate and distinct taxpayers for the purposes of s. 47(1), and that s. 245(2) will not be applied.

Identical properties acquired after December 31, 1971 to which the attribution rules apply constitute a separate pool from other identical properties acquired after December 31, 1971 for purposes of computing their adjusted cost base.

RC is not in the practice of applying s. 47(1) in the situation where a taxpayer purchases his wife's 1/2 interest in their condominium.

Before finding that an individual immigrating to Canada was entitled to treat his silver certificates as silver and, thus, as inventory for purposes of applying the administrative position in IT-346R that a speculator may choose to report his commodity transactions as capital gains or capital losses, but that they otherwise are subject to ordinary income treatment, the Department stated:

We have preciously determined that a silver or gold certificate is an obligation stating the issuer's liability to deliver upon demand the bullion in exchange for the certificate. Accordingly, the holder possesses merely personal rights, (rights in personam), enforceable against the issuer, rather than real rights (rights in rem) in the commodity itself. However, for purposes of subsection 47(1) and paragraph 54(i) of the Act and subsection 26(8) of the ITAR the Department adopted an administrative position that bullion and certificates of the same precious metal would be considered by the Department to be identical properties.

S. 7(1.31) applies in relation to shares of a public corporation if a share of the corporation is acquired under an agreement described in s. 7(1), an identical share is disposed of within 30 days after that acquisition, no other identical shares are acquired or disposed of by the employee after that acquisition and before the disposition, and the employee makes the required designation. If s. 7(1.31) applies, the employee is permitted to designate the most recently acquired shares as the shares deemed to be disposed of.

CRA commented on an example. An employee who acquired 10 common shares of the public-company employer, was also issued, for no consideration (other than services rendered), 10 restricted stock units (RSUs) of the employer under an agreement to which s. 7(1) applied. When the 10 RSUs vest, the employee is issued 10 common shares of the employer (the “RSU Shares”) with a fair market value of $10 per share. Immediately thereafter, the employer directs a broker to dispose of 5 RSU Shares, and the $50 proceeds are utilized by the employer to satisfy its withholding tax obligation.

CRA indicated that provided the s. 7(1.31) conditions were satisfied, the deemed cost of the RSU shares under s. 53(1)(j), equal to the taxable benefit of $100, would not be pooled with the lower ACB of the historical shares by virtue of s. 47(3), so that no gain would be realized on the sale of half of the RSU shares.