CRA rules on accessing the losses under s. 88(1.1) of a Lossco with nominal assets

A new corporation (the Taxpayer) was formed to acquire most of the remaining assets of a corporation (Lossco) that, together with its parent (Parentco) was in CCAA proceedings. It then continued to carry on that business in a similar manner, including hiring most of the employees and, in fact, hiring some more. Later, the Taxpayer acquired the shares of Lossco (which at that point had only nominal assets and no business or employees), and wound-up and dissolved Lossco. CRA ruled that s. 88(1.1) was generally available to flow through the Lossco non-capital losses (as reduced by some debt forgivenesses that had occurred under the CCAA court order) to the Taxpayer. The point may be that there is no requirement to receive significant assets, or perhaps no assets at all, on a s. 88(1) wind-up in order for the losses to flow through under s. 88(1.1).

CRA cast some shadows in 2018-0780041C6 on the standard practice of reducing the PUC of a Subco’s shares to a nominal amount before winding it up under s. 88(1), so as to avoid any potential gain under s. 88(1)(b) (e.g., where Parent acquired the net tax equity in Subco at a bargain price (for a low share ACB), avoiding a s. 88(1)(b) gain on wind-up through reducing PUC is considered by CRA to be abusive). Here, the proposed transactions specified that the PUC of the Lossco shares would be reduced immediately before its wind-up to an amount “not less than” the (modest) cost amount of the Lossco assets.

Neal Armstrong. Summary of 2021 Ruling 2020-0869161R3 under s. 88(1.1) and s. 88(1)(b).