CRA rules on sequential wind-ups of child, then grandchild, under s. 88(1) where the dissolutions were held in abeyance until resolution of tax litigation

After preliminary transactions, ParentCo and its historic subsidiary, SubCo were to be the only partners of a general partnership (Partnership C); and Partnership C, ParentCo and SubCo’s newly-incorporated subsidiary, NewCo2 were to be the only partners of a second general partnership (Partnership D).

Except as described below, SubCo was then to be wound-up into ParentCo (so that Partnership C would be dissolved by operation of law on a s. 98(5) rollover basis) and then, at least one week later, NewCo2 was to be wound-up into ParentCo (so that Partnership D also would be dissolved by operation of law on a s. 98(5) rollover basis). However, SubCo was currently in disputes (entailing litigation) with CRA regarding the results of multiple audits, and it was not expected that these disputes would be resolved prior to the implementation of the proposed transactions. Accordingly, the proposed steps contemplated that all the other steps for the winding-up of SubCo would occur on the same day, but the articles of dissolution for SubCo would not be filed until the tax litigation was settled – and similarly for the winding-up of NewCo2 which was to be commenced and largely implemented perhaps one week later.

CRA ruled that s. 88(1) would apply “on” the winding-up of SubCo, then of NewCo2, which it defined as all the steps from commencement of the winding-up to dissolution. Although not stated, presumably it was intended that the rollover provisions (e.g., the non-disposition rule in s. 88(1)(a.2) for a partnership interest) would apply from the outset in the taxation year that all these steps other than the dissolution occurred. CRA also provided somewhat apodictic rulings regarding the application of s. 98(5) to the windings-up of Partnerships C and D into ParentCo (i.e., it will apply if its conditions are met), including contemplating that there could be a bump of land, or shares of a public company.

One of the preliminary transactions on which CRA did not rule was the sale by Partnerships C and D of Canadian resource properties (CRP) to ParentCo for cash consideration so as to reduce the balances in their successor CCEE and CCOGPE, thereby minimizing the risk of s. 66.7(16) applying as a consequence of CRP transfers to ParentCo on their windings-up. (ParentCo expected to earn income from the CRP so transferred to it by Partnerships C and D at least equaling the amount of the successor CCDE and successor CCOGPE related to that CRP that might otherwise been stranded pursuant to s. 66.7(16) as a result of the partnerships’ dissolution.)

Neal Armstrong. Summaries of 2023 Ruling 2022-0941241R3 under s. 88(1), s. 66.7(16) and s. 98(5).