28 January 2016 External T.I. 2015-0617771E5 F - Bump calculation -- translation

Principal Issues: Amounts to be included in 88(1)(d)(i)(B) - deferred income taxes

Position: Not to be included

Reasons: No legal obligation to pay an amount

XXXXXXXXXX 2015-061777
M. Séguin

January 28, 2016

Dear Madam,

Subject: Paragraph 88(1)(d)

This is in response to your email of November 11, 2015 in which you requested our views regarding the application of paragraph 88(1)(d) of the Income Tax Act (hereinafter, the “Act").

Unless otherwise noted, all statutory references herein are references to the provisions of the Act.

This technical interpretation provides general comments about the provisions of the Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

Your question

For the purposes of paragraph 88(1)(c), clause 88(1)(d) provides how the "amount determined" should be calculated. Clauses (B) and (C) of subparagraph 88(1)(d)(i) provide that the amount of the property calculated in section (A) must be reduced by the amount of any debt owing by the subsidiary, or of any other obligation of the subsidiary to pay any amount, that was outstanding immediately before the winding-up, as well as the amount of certain reserves.

You wish to know if the balance presented in the financial statements of the subsidiary immediately before its winding-up as "future income tax liabilities" should be included in any of the clauses (B) and (C) of subparagraph 88(1)(d)(i). You indicated that this balance is essentially an accounting reserve which is not deductible in computing the income of the subsidiary.

Our Comments

Respecting clause (C) of subparagraph 88(1)(d)(i), as it only applies to reserves deducted in computing the subsidiary’s income for its taxation year during which its assets were distributed to the parent on the winding-up, the balance of the “future income tax liabilities” would not be included in this clause.

Clause (B) of subparagraph 88(1)(d)(i) applies to amounts each of which is the amount of any debt owing by the subsidiary, or of any other obligation of the subsidiary to pay any amount, that was outstanding immediately before the winding-up. The position of the Canada Revenue Agency is to consider an amount as a debt or other obligation of the subsidiary to pay an amount which is outstanding only to the extent that the amount represents a legal obligation to pay an amount. Given that this would not be the case for an amount of "future income tax liabilities" immediately before the winding-up, such an amount could not be included in such clause.

We trust that these comments will be of assistance.

Stéphane Charette, CPA, CMA, MBA
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy
and Regulatory Affairs Branch