CRA rules on a superficial gain transaction to transfer losses to a Profitco owned directly by the non-resident parent

CRA ruled on transactions for Profitco, which is an indirect wholly-owned Canadian subsidiary of a non-resident parent, to utilize the non-capital losses of Lossco, which is a direct wholly-owned Canadian subsidiary of the non-resident parent. Profitco transferred Class 12 property on a s. 85(1) rollover basis to Lossco in consideration for redeemable preferred shares of Lossco, then Lossco transferred the properties back to Profitco in consideration for redeemable preferred shares of Profitco having a paid-up capital equaling their redemption amount, with a joint s. 85(1) election being made at the estimated FMV of the properties, so that Lossco realized recapture of depreciation. The two preferred shareholdings were then redeemed for notes, and the notes set off.

In its summary, the Directorate stated:

The proposed subject transaction conforms with the CRA's policy to not apply subsection 55(2) of the Act to internal reorganizations within a related group for loss consolidation purposes and recognizing that property retains its character on a rollover transaction between related parties is consistent with the CRA’s position in … 2014-0553731I7 that depreciable property should retain its character on wind-up.

Neal Armstrong. Summary of 2020 Ruling 2019-0834901R3 under s. 9 – capital gain vs. profit – equipment.