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: Administrative position regarding draft 88(1)(d)(ii)(B)
Position: See below.
Reasons: To alleviate the administrative burden of computing the tax-free surplus balance where such a calculation does not impact tax consequences to the taxpayer.
2011 International Fiscal Association Conference
Revenue Canada Round Table
May 18 - 19, 2011
Question - Draft Clause 88(1)(d)(ii)(B)
Where a Canadian corporation (Canco) that owns all of the shares of a foreign affiliate (FA) is wound-up into another Canadian corporation (Holdco) under subsection 88(1), draft clause 88(1)(d)(ii)(B) may restrict the bump-room otherwise available in respect of the FA shares by an amount computed under draft subsection 5905(5.4) of the Regulations by reference to FA's tax-free surplus balance (TFSB) in respect of Canco. In some circumstances the requirement to compute FA's TFSB for this purpose can create an administrative burden that ultimately does not affect the tax results to Canco or to Holdco regardless of the amount of FA's TFSB.
Such would be the case in the following hypothetical fact scenario. A non-resident corporation (Forco) wishes to acquire Canco. Forco incorporates and capitalizes Holdco with the funds required for the acquisition. Holdco then acquires all of the issued and outstanding shares of Canco from persons dealing at arm's length with Forco and Holdco. The acquisition of Canco is soon followed by a reorganization whereby Canco is wound-up and all of the shares of FA that are received by Holdco on the wind-up are transferred by Holdco to Forco on a reduction of the paid-up capital of Holdco. FA's surplus balances become irrelevant once Forco takes ownership of the shares of FA.
Assuming no dividends are received, or deemed to be received, by Canco or Holdco from FA at any time after the takeover of Canco by Holdco and if absent draft clause 88(1)(d)(ii)(B) the shares of Canco could be bumped to fair market value such that there would be no gain to Holdco on the subsequent distribution of the FA shares to Forco, will CRA require Holdco to calculate the amount of the TFSB of FA and limit the paragraph 88(1)(d) bump in respect of the shares of Canco by that amount?
CRA Response
In the above circumstances, CRA will not challenge the paragraph 88(1)(d) bump in respect of the shares of FA by raising an issue with FA's TFSB calculation or lack thereof, provided that the FA shares are transferred to Forco by Holdco within a reasonable time after the takeover of Canco and provided that neither Canco nor Holdco receives, or is deemed to receive, any dividends from FA after the takeover.
Shelley Lewis
2011-040452
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, 2011
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, 2011
Email this Content