In 2012-0464901I7 (released last week), the Rulings Directorate concluded that the “substituted share” concept, contained in proposed new s. 93(2.01) and existing s. 93(2), could apply to any sequence of property substitutions even if the property substituted within the sequence does not involve a share. Proposed new s. 93(2.01) (and existing s. 93(2)) is a stop-loss rule that reduces a capital loss realized on a share of a foreign affiliate (FA) to the extent of prior exempt surplus dividends paid on the FA share or some other share for which that FA share was substituted. In the example considered, Canco transferred shares of one FA (FA 1) to another FA (FA 2) in exchange for a promissory note owed by FA 2 (the Note). Canco then transferred the Note to a third FA (FA 3) in exchange for shares of FA 3. The Rulings Directorate said the rule in s. 248(5)(a) – which essentially ties together any sequence of property substitutions – applies for purposes of s. 93(2.01). Further, that rule cannot be restricted in the context of s. 93(2.01) only to situations where shares are substituted throughout the sequence. Accordingly, in the case considered, the shares of FA 3 were considered to be “substituted for shares” of FA 1 notwithstanding that the intervening substituted property (the Note) did not involve a share.