Tax Tip[] Stop-Loss Rules

Using Stop-Loss Rules To Your Benefit

“Spousal transfers can result in transfer of cost base..”

There are a number of rules to ensure that a loss cannot be created on transfers between spouses. These stop-loss rules apply to transfers between spouses, as well as transfers to a spouse’s corporation, trust or partnership. There are, however, situations where the stop-loss rules can be used advantageously.

If a husband realized capital gains in the year, and his wife owns investments that have accrued capital losses, tax planning may permit the husband to use her capital losses. Normally, any transaction between spouses occurs at cost unless an election is made under subsection 73(1) that the transaction should take place at fair market value.

In the example above, if the wife were to elect to transfer her investments to her husband at fair market value, there would be a capital loss to the wife. This loss, however, would be denied. It would be added to the cost base of the husband’s investment. The net result would be that the husband would now have an investment with a high cost base and a low fair market value. When the husband sells the shares, he would realize a capital loss that could be used to offset capital gains that he had realized during the year.

One cautionary note: the CRA may attempt to apply the General Anti-Avoidance Rules on this transaction.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Revised Stop-Loss Rules For Post Mortem Planning

“Proposed rules allow post mortem estate planning..”

Subsection 40(3.6) is a stop-loss rule that defers the recognition of a loss when there is a loss on shares that an affiliated person continues to hold.

There were proposed amendments to subsection 251.1(1) dealing with when a person is affiliated with a trust. Under these new rules related to a trust, a person would be affiliated to the trust where the person is a majority interest beneficiary. The result of this was a significant problem with regard to estate planning in order to take advantage of a loss in the first year of the estate under subsection 164(6). Normally, the executors of the estate would create a loss in the first year of the estate and the loss would be carried back against capital gains in the terminal return. However, with the proposed new rules, the loss could have been denied in many situations.

New subsection 40(3.61) is meant to ensure that the stop-loss rules under subsections 40(3.4) and 40(3.6) do not apply to any portion of an estate capital loss carried back under subsection 164(6). Therefore, if a capital loss is being created to carry back against a capital gain in a terminal return, it will not be deferred or denied under subsections 40(3.4) or 40(3.6). This is a significant proposal that could affect many many estates. These proposed rules will apply to dispositions occurring after March 22, 2004.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.