CRA rules that Reg. 5907(2)(f) does not apply where inventory is transferred on a foreign rollover basis
In order to wind-up CFA2 into CFA1 (which is directly held by Canco), CFA2 will first distribute its retained earnings and then sell its assets at their book value (i.e., for less than their FMV) in exchange for a promissory note of CFA1 and the assumption of liabilities, with that note then being extinguished as a result of its assignment to CFA1 on the formal liquidation of CFA2. The asset transfers by CFA2 to CFA1 will occur on a rollover basis under the foreign tax law.
CRA ruled that no amount of revenue, income or profit will be added to the earnings of CFA2, pursuant to Reg. 5907(2)(f) respecting CFA2’s transfer of non-capital assets to CFA1. In its summary, CRA stated:
Since the transfer of the non-capital assets is done on a rollover basis under the relevant foreign income tax law, the conditions of paragraph 5907(2)(f) are not met.
More routinely, CRA ruled that Reg. 5907(5.1) will apply to the disposition by CFA2 of its capital property to CFA1 on these transactions.
S. 15(1) will not apply notwithstanding that CFA2 sold its assets to its shareholder at book value rather than their higher FMV.