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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: Various issues on 88(3) dissolutions and 93(1) elections
Position: see attached memo
Reasons: see attached memo
January 9, 2003
Montréal Tax Services Office International Section
International Audit Tim Kuss
Section 446-2-1 613-957-2117
305 René-Lévesque Blvd., 3rd Floor
Montréal (Québec) H2Z 1A6
Attention: Loan Nguyen 2002-017814
Subsection 88(3) Dissolutions and 93(1) Elections
This is in reply to your memorandum dated December 9, 2002, requesting our views regarding the application of subsections 88(3) and 93(1) to the hypothetical situation described below. Certain facts described in your memo have been simplified in order to focus on the issues that were of particular concern to you. Our analysis and comments are also based on the assumption that there are no foreign exchange issues.
Canco is a corporation resident in Canada. Canco owns 100% of the shares of FA1, a non-resident corporation. FA1 owns 100% of the shares of FA2, a non-resident corporation.
FA1 and FA2 are each a "foreign affiliate" and "controlled foreign affiliate" of Canco. The shares of FA2 are "excluded property" of FA1. The year-end of both FA1 and FA2 is December 31.
FA1 is going to be dissolved immediately after its normal year-end and the assets of FA1 will be distributed to Canco at that time. At its normal year-end immediately preceding the dissolution, FA1 will have an "exempt surplus" balance of $40. The assets of FA1 consist solely of $50 cash and the shares of FA2. Neither FA1 nor FA2 will have any liabilities at the time of the dissolution.
At the time of the dissolution, the "exempt surplus" balance of FA2 is $20, the adjusted cost base of FA1's shares of FA2 is $10, the adjusted cost base of Canco's shares of FA1 is $10 and the fair market value of FA1's shares of FA2 is $30.
You have asked us to assume that the dissolution took place prior to the coming-into-force of the amendment to paragraph 93(2)(b) which restricted its application to losses from the dispositions of shares of a foreign affiliate that are not "excluded property".
Analysis and Discussion
FA1 will, for purposes of Part LIX of the Regulations, be deemed by paragraph 5907(9)(a) thereof to have a year-end immediately before the dissolution, but after its normal year end (the "Deemed Year End").
Subsection 88(3) will apply to the dissolution of FA1. Pursuant to paragraph 88(3)(a), FA1's proceeds of disposition of its shares of FA2 will be $10 (assume Canco does not claim a greater amount, not exceeding the fair market value of the shares of FA2).
As the shares of FA2 are excluded property to FA1, subsection 93(1.1) will apply to the disposition of the shares of FA2. However the subsection will not have any impact, as the operation of paragraph 88(3)(a) will not result in a capital gain to FA1 on the disposition.
This does not preclude Canco from making an election pursuant to subsection 93(1), in addition to the amount, if any, determined under subsection 93(1.1).
Absent any 93(1) elections being made, pursuant to paragraph 88(3)(b) Canco's proceeds of disposition of its shares of FA1 will be $60 (represented by the $50 cash received on dissolution and the $10 adjusted cost base of the shares of FA1) resulting in a $50 capital gain.
It is our view that the dissolution of FA1 involves a two-step process. The first step is the distribution of the assets of FA1 to Canco and the second step is the disposition by Canco of its shares of FA1. To state another way, it is our opinion that the opening words to subsection 88(3), "Where on the dissolution of a controlled foreign affiliate ... of a taxpayer ... one or more shares of the capital stock of another foreign affiliate of the taxpayer have been disposed of to the taxpayer ..." is simply describing the conditions that must be satisfied "in the course of" or "as part of" the dissolution in order for subsection 88(3) to apply. It does not mean, or imply, that the two dispositions occur simultaneously.
In order to eliminate the above $50 gain, it is our opinion that it would be necessary to make two separate 93(1) elections, the first in respect of the disposition by FA1 of its shares of FA2 and the second in respect of the disposition by Canco of its shares of FA1.
For example, Canco could elect at an amount of $10 in respect of the disposition by FA1 of the shares of FA2. This would result in $10 of exempt surplus of FA2 moving up to FA1. This surplus would then be available at FA1's Deemed Year End for a 93(1) election in respect of the disposition by Canco of its shares of FA1 (note that, absent any "additional cost base claim", the upper limit for the 93(1) election in respect of the disposition of the shares of FA2 would be $10, i.e., the proceeds of disposition under paragraph 88(3)(a)). The resulting loss otherwise determined of FA1 would be deemed to be nil under subsection 93(2). (Note that had the disposition of the shares of FA1 occurred after November 1999, subsection 93(2) would not have reduced the loss otherwise determined and such loss would be included in computing FA1's surplus accounts at the Deemed Year End.)
Canco could then elect at $50 under subsection 93(1) in respect of the disposition of its shares of FA1, resulting in a $50 dividend out of "exempt surplus" (comprised of the $40 that existed before the dissolution and the $10 that moved up on the disposition of the shares of FA2).
We would also point out that making an additional cost base claim, while increasing the proceeds to FA1 (resulting in a gain in respect of which a 93(1) election could be made), would cause the proceeds of disposition to Canco under paragraph 88(3)(b) to be increased by the same amount, therefore the gain to Canco would not be reduced as a result of the additional cost base claim.
If only one 93(1) election is made (i.e. in respect of the disposition by Canco of the shares of FA1) only $40 of exempt surplus would be available and Canco could not eliminate the full amount of the gain otherwise determined. It is our view that, at the time of such disposition, FA1 would no longer own the shares of FA2 and the surplus of FA2 would not be available for the 93(1) election, hence the need for two separate elections.
We hope our comments are of assistance.
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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