3.3 Losses on the disposition of property involving an affiliated person

A loss sustained by the trust on the disposition of property involving an affiliated person is not deductible. However, the loss may give rise to a carry-over mechanism, with rules that vary according to whether the property concerned is depreciable property or non-depreciable property (refer to sections 3.3.1 and 3.3.2).

In this section, an "affiliated person" is a person that is affiliated with the trust, that is:

• a majority-interest beneficiary of the trust;

• another trust, if a contributor to the other trust is affiliated with a contributor to the trust and:

  • a majority-interest beneficiary of one trust is affiliated with a majority-interest beneficiary of the other trust,

  • a majority-interest beneficiary of one trust is affiliated with each member of a majority-interest group of beneficiaries of the other trust, or

  • each member of a majority-interest group of beneficiaries of one trust is affiliated with at least one member of a majority-interest group of beneficiaries of the other trust;

• a corporation controlled directly or indirectly, in any manner whatever, by the trust or by an affiliated group of persons of which the trust is a member;

• a partnership of which the trust is a majority-interest partner.

In a broader context, a person is considered to be affiliated with:

• their spouse;

• a corporation controlled directly or indirectly, in any manner whatever, by the person, the person's spouse, an affiliated group of persons of which the person or the person's spouse (if applicable) is a member;

• a partnership of which the person is a majority-interest partner;

• a trust of which the person is a majority-interest beneficiary.

For the application of the rules for affiliated persons, a partnership is considered to be a person.

An affiliated group of persons is a group of which each member is affiliated with every other member.

21.0.3

A beneficiary of the trust is a majority-interest beneficiary at a particular time if one of the following conditions is met:

• the FMV of all the interests in the income of the trust held by the beneficiary and by all persons with whom the beneficiary is affiliated is greater than 50% of the FMV of all the interests in the income of the trust; or

• the FMV of all the interests in the capital of the trust held by the beneficiary and by all persons with whom the beneficiary is affiliated is greater than 50% of the FMV of all the interests in the capital of the trust.

21.0.1

A person is a contributor to the trust if the person has made a loan or transfer of property to the trust, either directly or indirectly, in any manner whatever, unless the following conditions are met:

• the person deals at arm's length with the trust at the time of the loan or the transfer;

• the person has not become a majority-interest beneficiary of the trust immediately after the loan or transfer; or

• the person makes the loan at a reasonable interest rate or makes the transfer for a consideration equal to the FMV of the property.

The trust is considered, at a particular time, to be a majority-interest partner of a partnership in the following circumstances:

• the trust's share of the partnership's income for the fiscal period ended before that time (or for the first fiscal period including that time, in the case of a new partnership) would have exceeded 50% of the partnership's income from all sources if the trust had held the same interest throughout the fiscal period as the interest that the trust or an affiliated person held in the partnership at that time;

• the trust would have received, together with all affiliated persons, more than 50% of the amount that the partnership would have paid to all partners otherwise than as a sharing of income if the partnership had been wound up at that time.

Identical property is property that is identical in every respect to another property (for example, the properties belong to the same type or class of property or they confer the same rights on their holder). The term "identical property" is also used to designate the right to acquire the other property. Moreover, a share that is acquired in exchange for another share under certain rollover rules is deemed to be property that is identical to the other share.

Shares of the capital stock of a SIFT wind-up corporation in respect of a SIFT wind-up entity that were acquired before 2013 are deemed to be property that is identical to interests in an entity that are an investment in the SIFT wind-up entity.

1, 21.0.1, 21.0.3, 237, 238.2

3.3.1 Non-depreciable property

The trust cannot deduct a capital loss sustained on the disposition of non-depreciable property (referred to as the "original property" below) if:

• in the 30 days that precede and the 30 days that follow the disposition, the trust or an affiliated person acquires substituted property that is, or is identical to, the original property; and

• at the end of the period, the trust or an affiliated person still owns the substituted property or has the right to acquire it.

However, the loss may be deducted later as a loss deemed to have been sustained immediately before the time at which the earliest of the following events occurs:

• The substituted property is disposed of in favour of a non-affiliated person. However, during the 30-day period following the disposition, neither the trust nor an affiliated person may own:

  • the substituted property; or

  • property that is identical to the substituted property and that was acquired during the 30 days that preceded the disposition.

• The substituted property is deemed to have been disposed of. This is the case if:

  • the trust ceases to be resident in Canada at the time it owns the substituted property;

  • the property is a debt that has become a bad debt, or a share issued by a corporation that has gone bankrupt or that was insolvent at the time it was wound up.

• The trust becomes subject to a loss restriction event.

The trust cannot deduct a capital loss sustained on the redemption of shares other than distress shares if the corporation that issued the shares is affiliated with the trust immediately after the transaction. However, if the trust holds a share of the capital stock of the corporation at that time (that is, immediately after the transaction), the amount of the loss may be used to reduce the capital gain that could be realized or to increase the capital loss that could be sustained by the trust on a subsequent disposition of the share. The ACB of each share of the corporation that is held by the trust at that time is increased by an amount obtained by multiplying the amount of the loss by the ratio, at that time, of the FMV of the share to the FMV of all the shares of the corporation held by the trust.

237, 238-238.3

3.3.2 Depreciable property

The trust cannot deduct a terminal loss upon the disposition of depreciable property (referred to as the "property concerned" below) if the following conditions are met:

• The following calculation results in an excess amount: subtract the proceeds of disposition of the property concerned (or its FMV at the time of the disposition, if the disposition is made for no consideration or for a consideration that is less than the FMV) from the lesser of amounts A and B, where:

  1. is the capital cost of the property,
  2. is the result of the following calculation: C × D ÷ E, where
     3. is the UCC of all property in the same class immediately before the time of the disposition,
     4. is the FMV of the property at that time, and
     5. is the FMV of all property in the class immediately before that time.

• On the 30th day after the disposition, the trust or an affiliated person owns the same property or has the right to acquire the property (other than, for example, a right, as security only, derived from a hypothec).

The consequences of the disposition are as follows:

• The proceeds of disposition of the property concerned are deemed to be equal to the lesser of amounts A and B. Thus, if the property concerned is the last in the class, a terminal loss cannot be claimed.

• The previously mentioned excess amount (the amount by which the lesser of amounts A and B exceeds the proceeds of disposition of the property or its FMV, as applicable) is deemed to be the capital cost of hypothetical property that is deemed owned by the trust before the beginning of the taxation year in which this disposition occurs and that is in the same class as the property concerned. Thus, the trust can claim capital cost allowance for the hypothetical property, without applying the half-year rule (50% reduction of the amount of capital cost allowance). The trust is entitled to such a deduction until the time that immediately precedes the earliest of the following events:

  • the trust or an affiliated person no longer owns or has a right to acquire the property concerned for a period of at least the following 30 days (unless the right is a guarantee, such as a mortgage);

  • the trust or an affiliated person ceases to use the property concerned for the purpose of earning income;

  • the trust ceases to be resident in Canada while owning the property concerned (the trust is deemed to have disposed of the property);

  • the trust is subject to a loss restriction event.

If, during the event in question, the trust has no other property in the class, the UCC of that class entitles the trust to a deduction for a terminal loss.

93.3.1

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