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?
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.
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