Suppression election addresses excess of inside over outside basis (p. 6)
Importantly, new subsection 88(3.3) provides for a "suppression election" opportunity, if the liquidation is electively treated as a QLAD, so as to "suppress" the cost of the distributed capital properties received by the Canadian taxpayer to the elected amounts. [fn 11: Subsection 88(3.4) establishes the limits for the suppression election. Essentially, for each distributed capital property the claimed proceeds of disposition must be no greater than they otherwise would have been (cannot elect to increase proceeds), and the aggregate suppressed proceeds on all distributed properties must not exceed the taxpayer's capital gain amount on the shares of the liquidating foreign affiliate (cannot suppress to such an extent that the gain becomes a loss).] The effect of a suppression election is to reduce the net distribution amount, and thus reduce the Canadian taxpayer's proceeds of disposition of the shares of the liquidating foreign affiliate. Therefore, a QLAD election combined with a suppression election enables the taxpayer to minimize or avoid the capital gain on the shares of the liquidating foreign affiliate that would otherwise be realized if the "inside basis" exceeds the "outside basis". The subsection 88(3.3) suppression election must also be made in accordance with Regulation 5911(1), with a deadline of June 26, 2014 for historic foreign affiliate liquidations commencing after February 27, 2004. [fn 12: See subsection 88(2) of Bill C-48.]
2011 broadening (p. 4)
The new foreign affiliate merger rollover in paragraph 95(2)(d.1) has been amended, among other things, to eliminate the "90% surplus entitlement percentage" and "foreign non-recognition" conditions, and to broaden the deemed rollover disposition so that it applies to all property of the predecessor foreign affiliates, not just capital property.
Retroactive election (p. 4)
Bill C-48 permits a taxpayer to elect to retroactively apply new paragraph 95(2)(d.1) to all of its foreign affiliate mergers occurring after December 20, 2002. Consequently, taxpayers now have the one-time opportunity to elect to generally apply the broader rollover rule in paragraph 95(2)(d.1) retroactively to all post-December 20, 2002 foreign affiliate mergers….
2011 introduction of DLAD (p. 4)
New paragraph 95(2)(e) replaces the "90% surplus entitlement percentage" and "foreign non-recognition" conditions with a "designated liquidation and dissolution" (DLAD) requirement based on a broader range of 90% ownership tests (and without any foreign non-recognition requirement), and expands the scope of the rollover to all distributed property (not just capital property). A DLAD is defined in subsection 95(1) by reference to a foreign affiliate liquidation that meets one of three alternative "90% ownership" tests. The DLAD requirement is satisfied if either (i) the Canadian taxpayer had a 90% surplus entitlement percentage in respect of the liquidating foreign affiliate, (ii) one foreign affiliate shareholder holds shares of the liquidating foreign affiliate representing at least 90% of "votes and value", or (iii) one foreign affiliate shareholder owns at least 90% of each class of shares of the liquidating foreign affiliate.
Retroactive election (p. 5)
Taxpayers may elect to retroactively apply new paragraph 95(2)(e) to foreign affiliate liquidations beginning after December 20, 2002, with the same deadline as applies for paragraph 95(2)(d.1). [fn 8: See subsection 71(28) of Bill C-48. This election must be made in writing by the later of (i) the date that is one year after Bill C-48 received Royal Assent (June 26, 2014), and (ii) the taxpayer's tax return filing due date for its taxation year that includes the date on which Bill C-48 received Royal Assent.] However, where this election is made, a modified version of the DLAD definition, and of paragraph 95(2)(e) itself, applies for liquidations beginning after December 20, 2002 but before August 19, 2011. [fn 9: In particular, the "90% of votes and value" branch of the DLAD test is simplified to a "90% of value" test; and the modified version of paragraph 95(2)(e) provides, for a DLAD, that the shares of the liquidating foreign affiliate are in all cases deemed disposed of on a full rollover basis for proceeds of disposition equal to the shareholder foreign affiliate's adjusted cost base of those shares.] The main difference is there is no forced loss realization (and surplus grind) for excluded property shares of the liquidating foreign affiliate.
Retroactive election (p. 3)
… Bill C-48 permits taxpayers to electively apply Regulation 5901(2)(b) (together as a package with subsections 90(2) and 93(1.11)) retroactively to foreign affiliate distributions made after December 20, 2002.
Choice between surplus and basis grind (p. 3)
By electing to apply Regulation 5901(2)(b) retroactively, and by thereby electing to apply subsection 90(2) retroactively to deem each post-December 20, 2002 foreign affiliate distribution to be a dividend (regardless whether it was in fact paid as a dividend or a capital distribution), taxpayers can either (i) choose to treat the particular distribution as a dividend that accessed the relevant surplus balances of the distributing foreign affiliate (by not further electing to apply Regulation 5901(2)(b) to that particular dividend or deemed dividend), or (ii) choose to treat the particular distribution as a pre-acquisition surplus dividend that accessed the basis of the foreign affiliate before potentially dipping into the relevant surplus balances of the distributing foreign affiliate (by further electing to apply Regulation 5901(2)(b) to that particular dividend or deemed dividend).
E.g., resolving divided/capital character or surplus balances or using subsequently-ground exempt surplus (p. 3),
For example, consider an historic foreign affiliate distribution, paid for foreign corporate law purposes out of share premium, contributed surplus, or similar equity-type account where the Canadian tax treatment (as a dividend or capital distribution) might have been unclear. Or consider an historic dividend where the surplus balances might have been uncertain and there was a risk of elevating taxable surplus with insufficient underlying tax. Alternatively, consider an historic capital distribution paid by a foreign affiliate with exempt surplus that might have subsequently been eroded by exempt losses. In each of these cases, the Canadian parent now has the time-limited opportunity to reconsider the originally intended surplus and basis consequences of the distribution….
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