CRA indicates that the Reg. 5903(5)(b) continuity rules does not permit a foreign affiliate parent to carry back FAPI losses generated by a wound-up foreign affiliate
Perhaps as a result of changes to the Iceland-U.S. Treaty, an Iceland “Sameignarfelag” (viewed by CRA as a partnership), which had been serving as a Finco to foreign affiliates in a Canadian multinational group was wound up into its non-resident partners (NR1 and NR2, wholly-owned by Canco2). The interaffiliate loans had been giving rise to active business income to NR1 and NR2 under s. 95(2)(a)(ii)(B) and, thus, were excluded property. Even if the time of disposition by NR1 and NR2 of their partnership interests on the partnership wind-up were viewed as the time of the final partnership distribution rather than the subsequent time of formal dissolution of the partnership, by that time the partnership had disposed of its loans, so that the partnership interests at that time no longer qualified as excluded property. (In this regard, CRA referred only to paras. (b), (d) and (e) of the excluded property definition, and ignored para. (c), which references property (including presumably a partnership interest) substantially all of the income from which is active business income including deemed s. 95(2)(a)(ii) active business income – but CRA likely would have come to the same conclusion if it had also examined para. (c) given that the s. 95(2)(a)(ii) source of income had disappeared by the disposition time.)
Since the partnership interests were not excluded property at the time of their disposition on the winding-up, their ACB was to be computed in Canadian dollars under Reg. 5908(10), i.e., essentially it became irrelevant that for most of its life, the Icelandic partnership held excluded property for which the calculating currency of its partners was to be used. This, in turn, meant that NR1 and NR2 realized a capital loss for FAPI purposes on the partnership wind-up. (The wind-up apparently occurred in pre-FACL days.)
The principal former partner was NR1. Canco2 transferred NR1 to the non-resident subsidiary (NR3) of its Canadian sister (Canco1 – which, like Canco2, was wholly-owned by the Canadian parent of this multinational group). NR1 was then wound-up into NR3.
CRA accepted that under Reg. 5903(5)(b), which deems the parent foreign affiliate on a designated liquidation and dissolution under s. 95(2)(e) to be the same corporation as and a continuation of the dissolved foreign affiliate for specified purposes, NR1 would be able for FAPI purposes to carry forward the loss of NR1, but that NR3 was precluded from carrying back that loss to prior taxation years.