CRA rules that a terminal loss denied under s. 13(21.1)(a) can be used to bump the land elected amount

Subco has entered into an agreement for the sale to an arm’s length purchaser of a property containing parcels of land with accrued capital gains and buildings thereon with accrued terminal losses. Since its Parent has accrued losses, the property is spun-off to a Newco subsidiary of Parent in reliance on s. 55(3)(a), with Newco then wound-up under s. 88(1) so that the capital gains can be realized in Parent’s hands.

On the spin-off of the property by Subco to Newco, CRA indicated that the s. 13(21.1)(a) rule for denying a terminal loss was to be applied after applying s. 85(1) without regard to s. 13(21.1)(a). For example, suppose that a parcel of land had an ACB and FMV of $200 and $400, and that the accrued terminal loss on the building thereon was $50. Subco and Newco would designate an s. 85(1) agreed amount for the parcel of $250. S. 13(21.1)(a) then kicks in to deny the $50 terminal loss but also to reduce the deemed proceeds to Subco from $250 to $200. Insofar as Newco is concerned, the agreed amount is still $250, so that in effect the terminal loss is used to bump the land ACB to Newco (and ultimately to Parent) by $50.

The loss suspension rule in s. 13(21.2) would be irrelevant because the sale to the purchaser would occur shortly thereafter.

Another interesting feature is that a preliminary s. 86 reorg was effected through an exchange of the “old” common shares of Subco for newly created common shares (having more votes per shares) and preferred shares pursuant to a share exchange agreement rather than by virtue of articles of amendment changing the old shares into the new shares. In other words, a “dirty” s. 85 exchange mechanic was used, but no s. 85 election was made so that s. 86 applied instead.

Neal Armstrong. Summaries of 2016 Ruling 2016-0635101R3 under s. 13(21.1)(a), s. 55(3)(a) and s. 86(1).