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May 2, 2019


By: Amanda Laren

Published in Canadian Tax Foundation | May 01, 2019

Subsections 40(3.3) and (3.4) generally apply to prevent a corporation, partnership, or trust from realizing a pregnant loss on certain non-depreciable capital property by transferring the property within an affiliated group. Where the rules apply, the loss is "suspended" and cannot be claimed by the transferor until a listed trigger event occurs, such as a disposition to an unaffiliated person. Subsections 40(3.3) and (3.4) stipulate whether the two parties remain affiliated after the transferor is dissolved or wound up, but only if the transferor is a corporation or a partnership. Thus, if a trust distributes property to an affiliated beneficiary and winds up immediately after the distribution, it is unclear whether these suspended-loss rules apply. This gap in the legislation may not come up often in practice, since trusts may generally distribute assets to Canadian-resident beneficiaries on a rollover basis under subsection 107(2), but it could be relevant when the distribution is not executed on a rollover basis (for example, pursuant to a subsection 107(2.001) election) or when a trust transfers property to a person who is not a beneficiary. 

There are several CRA rulings dealing with alter ego trusts that imply that a transferee cannot be affiliated with a transferor trust once the trust has wound up. In fact, on at least two occasions, the CRA has explicitly stated that a person cannot be affiliated with a trust that has wound up: see CRA document nos. 2007-0221361R3, released October 17, 2008 and 2008-0292121R3, released March 6, 2009. While these statements are fairly explicit, their efficacy may be limited because they are rulings, and not general statements of the CRA's position. Also, because these rulings were heavily redacted, one cannot be sure that there was an affiliation prior to the trusts' windup. 

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Tax Law  |  Estate & Succession Planning

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