CRA applies s. 13(7)(e)(ii) to the purchase of a depreciable property from a non-arm’s length non-resident corporation with no tax nexus to Canada

A non-resident corporation (“US Corp”) sold trademarks at a sales price in excess of their adjusted cost base to a non-arm’s length Canadian resident corporation (Canco). Canco took the position that, as US Corp was a non-resident corporation which was not liable for tax in Canada, it was not a “taxpayer” under the Act in light of Oceanspan, so that it could not be considered to have a “capital property” (whose definition references a taxpayer), as required for the application of s. 13(7)(e)(ii). Accordingly, s. 13(7)(e)(ii) did not apply to reduce the step-up in the capital cost of the trademarks (which were Class 14.1 property) to it.

The Directorate rejected this position and found that s. 13(7)(e)(ii) was also applicable where the non-arm’s length transferor was a non-resident. In distinguishing Oceanspan (which entailed the purported generation of non-capital losses by a non-resident corporation while it was not subject to Canadian tax), it stated:

In the current situation, the object and purpose of subparagraph 13(7)(e)(ii) is to establish the resident purchaser’s capital cost of depreciable property acquired from a non-arm’s length transferor for CCA purposes. The purpose is not to determine the tax liability of the non-resident transferor corporation.

Neal Armstrong. Summary of 4 March 2023 Internal T.I. 2023-0994501I7 under s. 13(7)(e)(ii).