CANADA CUSTOMS AND REVENUE AGENCY INTERPRETATION BULLETIN NUMBER: NO: IT-387R2 (Consolidated) DATE: See Bulletin Revisions section SUBJECT: INCOME TAX ACT Meaning of "Identical Properties" REFERENCE: Section 47 (also section 47.1, subsections 138(11.1) and 248(12); and the definition of "superficial loss" in section 54 of the Income Tax Act (the Act); and subsections 26(8), (8.1) and (8.2) of the Income Tax Application Rules, 1971 (ITAR)) Latest Revision – Paragraph 7 At the Canada Customs and Revenue Agency (CCRA), we issue income tax interpretation bulletins (ITs) in order to provide technical interpretations and positions regarding certain provisions contained in income tax law. Due to their technical nature, ITs are used primarily by our staff, tax specialists, and other individuals who have an interest in tax matters. For those readers who prefer a less technical explanation of the law, we offer other publications, such as tax guides and pamphlets. While the comments in a particular paragraph in an IT may relate to provisions of the law in force at the time they were made, such comments are not a substitute for the law. The reader should, therefore, consider such comments in light of the relevant provisions of the law in force for the particular taxation year being considered, taking into account the effect of any relevant amendments to those provisions or relevant court decisions occurring after the date on which the comments were made. Subject to the above, an interpretation or position contained in an IT generally applies as of the date on which it was published, unless otherwise specified. If there is a subsequent change in that interpretation or position and the change is beneficial to taxpayers, it is usually effective for future assessments and reassessments. If, on the other hand, the change is not favourable to taxpayers, it will normally be effective for the current and subsequent taxation years or for transactions entered into after the date on which the change is published. If you have any comments regarding matters discussed in an IT, please send them to: Manager, Technical Publications and Projects Section Income Tax Rulings Directorate Policy and Legislation Branch Canada Customs and Revenue Agency Ottawa ON K1A 0L5 Most of our publications are available on our Web site at: www.ccra.gc.ca This version is only available electronically. Contents Application Summary Discussion and Interpretation General (paragraph 1-3) Gold Bullion and Gold Certificates (paragraph 4) Bonds, Debentures, Notes, etc. (paragraph 5) Escrowed Shares (paragraph 6) Convertible Shares (paragraph 7) Commodity Futures Contracts (paragraph 8) Indexed Securities (paragraph 9) Life Insurance Corporations (paragraphs 10-11) Other Publications (paragraph 12) Bulletin Revisions Application This bulletin is a consolidation of the following: - 387R2 dated July 14, 1989; and - subsequent amendments thereto. For further particulars, see the "Bulletin Revisions" section near the end of this bulletin. Summary Special rules are applicable to determine the adjusted cost base of identical properties for purposes of determining any capital gain or loss on their disposition. This bulletin discusses the meaning of identical properties as well as a number of kinds of such properties. Discussion and Interpretation General Paragraph 1. "Identical properties", for the purposes of subsection 47(1), the definition of "superficial loss" in section 54 of the Act and subsection 26(8) of the ITAR (and subject to the provisions referred to in paragraph 5 and paragraphs 9 to 11), are properties which are the same in all material respects, so that a prospective buyer would not have a preference for one as opposed to another. To determine whether properties are identical, it is necessary to compare the inherent qualities or elements which give each property its identity. Such a determination is a question of fact which must be decided on the basis of the relevant details in each situation. Paragraph 2. The identical nature of properties is not affected by the fact that ownership is evidenced by means of certificates which may represent different quantities of the properties, as in the case of share certificates or gold certificates. Paragraph 3. Two properties which are otherwise identical do not cease to be so merely because one is subject to a charge or other external condition which may affect its price and the other is not, provided the external condition does not change any of the constituent elements of the particular property (e.g., provincial retail sales tax, commission fees). Gold Bullion and Gold Certificates Paragraph 4. Gold bullion and gold certificates (or bullion and certificates of the same precious metal) are considered by the Canadian Customs and Revenue Agency (CCRA) (see note 1 below) to be identical properties. Furthermore, it is the CCRA's (see note 2 below) view that a particular certificate and the bullion to which it relates are the same property, with the result that an exchange of a certificate for bullion or bullion for a certificate will not be considered a disposition. Note 1: Corrected [September 12, 2002] Note 2: Corrected [September 12, 2002] Bonds, Debentures, Notes, etc. Paragraph 5. Pursuant to (a) subsection 248(12) of the Act for taxation years and fiscal periods commencing after June 17, 1987 that end after 1987, (b) subsection 47(3) of the Act for other taxation years and fiscal periods, and (c) subsection 26(8.2) of the ITAR, one bond, debenture, bill, note or other similar obligation issued by a debtor is deemed to be identical to another such obligation issued by the same debtor, provided that both are identical in respect of all rights attaching thereto, but without reference to the principal amount of such obligation. Stripped bonds are identical to other stripped bonds of the same issue but they are not considered to be identical to bonds of the same issue from which the interest coupons have not been detached. Escrowed Shares Paragraph 6. Shares of the capital stock of a corporation which are subject to an escrow agreement so as to prevent the owner thereof from dealing in them (escrowed shares) and shares of the same class and kind of the capital stock of the same corporation which are not so restricted (free shares) are considered to be identical properties, notwithstanding that the value of the escrowed shares may be less than the value of the free shares, provided that (a) the escrowed shares have been issued by the corporation, and (b) the escrow agreement restricts only the right of sale of the escrowed shares. Shares which are merely allotted conditionally would not be identical to free or escrowed shares which have been issued. Convertible Shares Paragraph 7. Shares of two different classes of the capital stock of a corporation are not identical if they do not have the same interests, rights and privileges. For example, Class A common shares of a corporation and Class B common shares of the same corporation which are the same in all respects, except that the Class A shares are voting and the Class B shares are non- voting, are not considered to be identical since they provide for different rights. In some cases, the holders of shares of one class are entitled to exchange them for shares of the other class. For example, Class X common shares of a corporation and Class Y common shares of the same corporation are the same in all respects, except that the Class X shares are voting and the Class Y shares are non-voting, and that the holders of the Class X shares are entitled to exchange them for Class Y shares. Of course, where a taxpayer exchanges Class X shares for Class Y shares, the Class Y shares acquired on the conversion are identical to any Class Y shares already held or subsequently acquired by the taxpayer. Furthermore, it should be noted that the right or privilege of conversion or exchange attached to the Class X shares constitutes a right to acquire a property and that such a right is deemed to be a property that is identical to the Class Y shares for the purpose of the definition of "superficial loss" in section 54 of the Act. Therefore, the existence of a right or privilege of conversion or exchange attached to shares of the capital stock of a corporation may, in some circumstances, result in a taxpayer's loss from a disposition of a share being considered a "superficial loss" within the meaning of section 54 of the Act. For example, assume that an individual (other than a trust) owns Class Y shares. The individual disposes of his or her Class Y shares. A loss arises on such disposition. Within the period described in paragraph (a) of the definition of "superficial loss" in section 54 of the Act, the individual acquires Class X shares. In such a case, the individual's loss from the disposition of the Class Y shares would be a "superficial loss" within the meaning of section 54 of the Act. Commodity Futures Contracts Paragraph 8. Commodity futures contracts which grant to the holder thereof the same rights are considered to be identical. That is, futures contracts for the same standard amount of the same commodity for delivery in the same month are considered to be identical. Indexed Securities Paragraph 9. During the period after September 30, 1983 and before January 1, 1986, subsection 47(4) provided that properties which were defined by paragraph 47.1(1)(e) as indexed securities were not subject to the identical properties rules. Indexed securities no longer exist as the law concerning Indexed Security Investment Plans was repealed, applicable after January 1, 1986. Life Insurance Corporations Paragraph 10. For the purposes of section 47, properties of a life insurance corporation which would otherwise be identical are deemed by subsection (11.1) not to be identical unless they are (a) non-segregated property used by it in the year in, or held by it in the year in the course of, carrying on a life insurance business in Canada, or (b) non-segregated property used by it in the year in, or held by it in the year in the course of, carrying on an insurance business in Canada other than a life insurance business. Paragraph 11. For the purpose of subsection 26(8) of the ITAR, properties owned by a life insurance corporation which would otherwise be identical are deemed by subsection 26(8.1) of the ITAR not to be identical unless they are (a) included in the same segregated fund (as defined in subsection 138.1(1)), (b) non-segregated property described in paragraph 10(a) above, or (c) non-segregated property described in paragraph 10(b) above. Other Publications Paragraph 12. The latest revisions of the following Interpretation Bulletins may be referred to for additional information on the subject of identical properties: IT-78 - Capital Property Owned on December 31, 1971 – Identical Properties IT-88 - Stock Dividends IT-115 - Fractional Interests in Shares IT-146 - Shares Entitling Shareholders to Choose Taxable or Capital Dividends IT-199 - Identical Properties Acquired in Non-Arm's Length Transactions Bulletin Revisions Paragraphs 2 to 6 and 8 to 12 have not been revised since the issuance of IT- 387R2 dated July 14, 1989. A Contents section has been added at the beginning of the bulletin. [September 12, 2002] Paragraph 1 has been revised to take into consideration the alphabetical reordering of various definitions in section 54 of the Act, and the subtitle "General" has been added. [September 12, 2002] Paragraph 7 has been revised to indicate that a conversion right attached to a class of shares of the capital stock of a corporation constitutes a "right to acquire a property" and that such a right is deemed to be a property that is identical to the property into which it is convertible for the purpose of the definition of "superficial loss" in section 54 of the Act. [September 12, 2002] The subtitle "Other Publications" has been added before paragraph 12. [September 12, 2002]