2001 Ruling 2001-0064973 - WIND-UP UNUSED SURTAX CREDITS

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: May a parent corporation carry back the unused surtax credits of its wholly owned subsidiaries, following a windup of those subsidiaries.

Position: The unused surtax credits accrued in the subsidiaries prior to the winding-ups may be carried back to offset Part I.3 tax payable in prior years by the parent. The GAAR would not be applied to prevent this outcome.

Reasons: Paragraph 87(2)(j.91) provides that, on amalgamation, the new corporation is a continuation of and the same corporation as its predecessors for the purposes of computing unused surtax credits except that the paragraph does not apply in respect of the taxes payable by any predecessor corporation. Paragraph 88(1)(e.2) provides that paragraph 87(2)(j.91) also applies on a winding-up with “new corporation” read as the parent and “predecessors” read as the subsidiaries. Therefore, on a winding-up, paragraph 87(2)(j.91) cannot affect the taxes payable by the subsidiaries, but does not preclude any effect on the taxes payable by the parent. The GAAR would not be applied simply because the more favourable of two methods of consolidating the parent with its subsidiaries is selected.

XXXXXXXXXX 					2001-006497

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance income tax ruling request, XXXXXXXXXX (“X Co.”),
XXXXXXXXXX (“Y Co.”), and XXXXXXXXXX (“Z Co.”)

This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling on behalf of the above named taxpayers. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved in the ruling request

(i) is in an earlier return of the taxpayer or a related person,

(ii) is being considered by a tax services office or taxation center in connection with a previously filed tax return of the taxpayer or a related person,

(iii) is under objection by the taxpayer or a related person,

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

(v) is the subject of a ruling previously issued by the Directorate.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (“the Act”) and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Our understanding of the relevant facts, proposed transactions and the purpose of the proposed transactions is as follows:

Definitions

“Canadian surtax payable” has the meaning assigned by subsection 181.1(6);

XXXXXXXXXX

“private corporation” has the meaning assigned by subsection 89(1);

“public corporation” has the meaning assigned by subsection 89(1);

“taxable Canadian corporation” has the meaning assigned by subsection 89(1); and

“unused surtax credits” has the meaning assigned by subsection 181.1(6).

Facts

1. X Co. is a corporation governed by the XXXXXXXXXX. X Co. is a “taxable Canadian corporation” and a “public corporation” whose shares are listed on the XXXXXXXXXX. X Co.’s address is XXXXXXXXXX, its business number is XXXXXXXXXX , its tax services office is the XXXXXXXXXX Tax Services Office and its taxation center is located in XXXXXXXXXX. X Co. has a floating taxation year-end, being XXXXXXXXXX.

2. Y Co. is a corporation governed by the XXXXXXXXXX. Y Co. is a “taxable Canadian corporation” and a “private corporation”. Y Co. is a wholly-owned subsidiary of X Co.. Y Co.’s address is XXXXXXXXXX, its business number is XXXXXXXXXX, its tax services office is the XXXXXXXXXX Tax Services Office and its taxation centre is located in XXXXXXXXXX. Y Co. has a floating taxation year-end, being XXXXXXXXXX.

3. Z Co. is a corporation governed by the XXXXXXXXXX. Z Co., which recently changed its name from XXXXXXXXXX, is a “taxable Canadian corporation” and a “private corporation”. Z Co. is a wholly-owned subsidiary of X Co.. Z Co.’s address is XXXXXXXXXX, its business number is XXXXXXXXXX its tax services office is XXXXXXXXXX Tax Services Office and its taxation centre is located in XXXXXXXXXX. Z Co. has a floating taxation year-end, being XXXXXXXXXX.

4. Y Co. has “unused surtax credits” from its XXXXXXXXXX through XXXXXXXXXX taxation years totalling approximately $XXXXXXXXXX. Y Co. expects to have a nominal, if any, “Canadian surtax payable” for its taxation year ending XXXXXXXXXX (the total of the XXXXXXXXXX through XXXXXXXXXX “unused surtax credits” and the XXXXXXXXXX “Canadian surtax payable” being the “Y Co. Unused Credits”).

5. Z Co. has nominal “unused surtax credits” from its XXXXXXXXXX taxation year. Z Co. expects to have “Canadian surtax payable” for its taxation year ending XXXXXXXXXX of approximately $XXXXXXXXXX (the total of the XXXXXXXXXX unused surtax credits and the XXXXXXXXXX Canadian surtax payable being the “Z Co. Unused Credits”).

6. In its XXXXXXXXXX through XXXXXXXXXX taxation years, X Co. has paid tax under Part I.3 in the amount of approximately $XXXXXXXXXX. X Co. expects to have tax payable under Part I.3 for its taxation year ending XXXXXXXXXX of approximately $XXXXXXXXXX.

7. In XXXXXXXXXX, Y Co. did not renew its service contract with its principal customer. As a result, Y Co.’s current business activity consists of holding assets in the approximate amount of $XXXXXXXXXX, plus holding substantial inter-company advances owed to it by X Co.

8. On XXXXXXXXXX, Z Co. sold substantially all of its assets to XXXXXXXXXX (“A Co.”), an arm’s length purchaser. The transfer was carried out as an asset sale as A Co. was not interested in acquiring, nor was Z Co. interested in disposing of Z Co.’s interest in its wholly-owned subsidiary, XXXXXXXXXX (“B Co.”). As a result of this sale, Z Co. effectively became a holding company of B Co.

Proposed transactions

9. Y Co. will be wound-up into X Co. pursuant to a written wind-up agreement between Y Co. and X Co.. It is intended that the winding-up be completed on or before XXXXXXXXXX and that subsection 88(1) apply on the winding-up of Y Co.

10. Z Co. will be wound-up into X Co. pursuant to a written wind-up agreement between Z Co. and X Co.. It is intended that the winding-up be completed on or before XXXXXXXXXX and that subsection 88(1) apply on the winding-up of Z Co.

Purpose of Proposed Transactions

The purpose of the proposed series of transactions is to consolidate the operations of X Co., Y Zo. and Z Co.. The consolidation is to be effected as a winding-up rather than an amalgamation for two reasons. First, it is intended that X Co. be able to deduct the Y Co. Unused Credits and the Z Co. Unused Credits against X Co.’s Part I.3 tax otherwise payable in X Co.’s XXXXXXXXXX taxation year, and to carry-back and deduct any excess Y Co. Unused Credits and/or Z Co. Unused Credits against X Co.’s Large Corporation’s Tax otherwise payable in X Co.’s XXXXXXXXXX through XXXXXXXXXX taxation years, to the maximum extent permissible by subsection 181.1(4). Second, it is expected that X Co. would have less exposure in respect of any potential liabilities of Y Co. and Z Co. following a winding-up than it would following an amalgamation.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions and provided further that the proposed transactions are carried out as described above, our rulings are as follows:

A. Provided the winding-ups described in 9 and 10 have been completed in accordance with the provisions of subsection 88(1), X Co. may claim such of the Y Co. Unused Credits and Z Co. Unused credits described in 4 and 5 as permitted by subsection 181.1(4) in computing its Part I.3 tax payable for taxation years of X Co. ending after or prior to the completion of the winding-up.

B. The provisions of subsection 245(2) will not be applied as a result of the Proposed Transactions, in and of themselves, to redetermine any of the tax consequences confirmed in ruling A.

Nothing in this advance tax ruling should be construed as implying that we are ruling on the amount of the “unused surtax credits” of any of X Co., Y Co. and Z Co., nor are we confirming the legal effectiveness of, or the completion dates of, the windings-up referred to in 9 and 10.

The rulings given are subject to the limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001 and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed before XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
Manager
Financial Institutions
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch