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.
Principal Issues: How does subsection 88(3) apply where a loan is made by a controlled foreign affiliate of a taxpayer to the taxpayer before the dissolution of the affiliate?
Position: An amount equal to the fair market value of the loan is included in the taxpayer's proceeds of disposition of the shares of the affiliate
Reasons: Required by subsection 88(3)
XXXXXXXXXX Daryl Boychuk
October 26, 2007
Re: Dissolution of Controlled Foreign Affiliate
This is in response to your letter of June 16, 2005 in which you asked for our comments on the application of subsection 88(3) of the Income Tax Act (the "Act") where a loan is made by a controlled foreign affiliate of a taxpayer to the taxpayer immediately before the dissolution of the affiliate. In your view, the amount of the loan should increase the taxpayer's proceeds of disposition of the shares of the foreign affiliate, however, you are not sure if the current or proposed versions of subsection 88(3) require this adjustment. We apologize for the delay in our reply.
It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments.
The current version and the proposed version (applicable to property received after February 27, 2004) of subsection 88(3) of the Act each contain rules which, in the event of the dissolution of a controlled foreign affiliate of a taxpayer to which that subsection applies, would include in the proceeds of disposition of the shares of the affiliate by the taxpayer, the fair market value of property (other than property that is a share of the capital stock of another foreign affiliate of the taxpayer) that is distributed to the taxpayer on the dissolution ("non-share property"). Under the current version of subsection 88(3), subparagraph 88(3)(b)(ii) deems the taxpayer's proceeds of disposition of the shares of the controlled foreign affiliate to include an amount equal to the fair market value of the non-share property disposed of to the taxpayer on the dissolution. Under the proposed version of subsection 88(3), paragraph 88(3)(c) deems the taxpayer's proceeds of disposition of the shares of the foreign affiliate to include an amount equal to the total of all amounts each of which is the cost to the taxpayer of a distributed property received by the taxpayer as consideration for the disposition of the shares. In this respect, the cost to the taxpayer of any non-share property distributed to the taxpayer on the dissolution would be deemed, by proposed paragraph 88(3)(b), to be equal to its fair market value.
In our view, the non-share property of a foreign affiliate of a taxpayer would include any rights that the foreign affiliate has as a creditor of the taxpayer. In circumstances where a loan receivable is distributed to the taxpayer on the dissolution of the foreign affiliate, we would consider it to be disposed of to, and received by, the taxpayer whether or not the obligation to pay is extinguished as a result of the taxpayer acquiring the loan receivable (see, in this respect, paragraph 69(5)(b) and proposed subparagraph 88(3)(b)(ii) which deem a shareholder of a dissolving corporation to have acquired the property distributed or appropriated to the shareholder). Accordingly, it is our view that the fair market value of the loan receivable would be included in the taxpayer's proceeds of disposition of the shares of the dissolving affiliate under both the current and proposed versions of subsection 88(3).
We trust that these comments will be of assistance.
International Section I
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2007
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2007