Application of the fill-in-the-hole rule may necessitate use of the suppression election

Eric Lockwood and Maria Lopes have provided excellent numerical examples of the application of the proposed qualifying liquidation and dissolution (QLAD) rules respecting the winding of a non-resident subsidiary (Foreignco 1) into a Canadian parent (Canco).  Canco generally will realize a capital gain on the disposition of its shares of the disposing affiliate (Foreignco 1) – even on an elected QLAD - where the adjusted cost base of Foreignco 1 in the distributed property, i.e., the inside basis, exceeds Canco’s ACB of its Foreignco 1 shares, i.e., the outside basis - unless it makes the "suppression election" under proposed s. 88(3.3).

For example, the suppression election may be required on the liquidation of a foreign affiliate (Foreignco 2), with a "blocking deficit," into Foreignco 1, followed by a liquidation of Foreignco 1 into Canco on an elected QLAD basis, because the application of the fill-the-hole rule in proposed Reg. 5905(7.2) can result in the inside basis being greater than the outside basis – and in fact they "suspect that the suppression election was specifically intended to apply to circumstances such as these."

Neal Armstrong.  Summary of Eric Lockwood and Maria Lopes, "Subsection 88(3): Deferring Gains on Liquidation and Dissolution", Canadian Tax Journal (2013) 61:1, 209-28 under Reg. 5905(7.2) and s. 93(1).