CRA characterizes the wind-up of a CFA into three shareholders as a transaction in which it is merged to form three corporations
Subject to exceptions, if a capital loss realized on the transfer by Canco of shares of a controlled foreign affiliate is suspended under s. 40(3.4), the loss will cease to be suspended when that CFA is wound-up. One of such exceptions is in s. 40(3.5)(c)(i), which effectively provides that there is no de-suspension if the CFA is merged such that there is a corporation formed on the merger (which then is deemed to own the CFA’s shares). In 2017-0735771I7 and 2018-0745501C6, the Directorate considered that s. 40(3.5)(c)(i) so applies if the CFA is wound-up on a rollover basis under s. 95(2)(e) or s. 88(3) into a parent.
CRA has now stretched s. 40(3.5)(c)(i) even further, and found that it applies if the CFA is wound-up into its three shareholders, having regard to ss. 33(2) and 3(1) of the Interpretation Act ("Words in the singular include the plural … unless a contrary intention appears.") This thus means that CRA regards all three former shareholders as being corporations that were formed on the “merger” and that own the CFA shares. CRA did not discuss what happens if one or two of the corporations subsequently ceases to exist.
Neal Armstrong. Summary of 25 June 2018 Internal T.I. 2017-0737151I7 under s. 40(3.5)(c)(i).