22 March 2012 External T.I. 2011-0407731E5 - Application of Subparagraph 152(4)(b)(iii)

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: Whether subparagraph 152(4)(b)(iii) applies to extend the period the Minister may make an assessment, reassessment or additional assessment in a situation where as a result of a wind-up of a Canadian subsidiary into the Canadian parent, the shares of a foreign subsidiary are distributed to the Canadian parent.

Position: Depends on the income being assessed or reassessed.
Relevant assessment or reassessment was made "as a consequence" of that transaction.

Reasons: The wind-up of a Canadian subsidiary into a Canadian parent would result in the disposition of the shares of a foreign subsidiary held by the Canadian subsidiary to the Canadian parent. In our view, this is a transaction involving the Canadian parent and the foreign subsidiary, a non-resident person with whom the Canadian parent is not dealing at arm's length. Therefore, this is a transaction to which subparagraph 152(4)(b)(iii) could apply, but only if it could be established that the relevant assessment or reassessment was made "as a consequence" of that transaction.

XXXXXXXXXX
									2011-040773
									Gillian Godson
						

March 22, 2012

Dear XXXXXXXXXX :

Re: Application of Subparagraph 152(4)(b)(iii)

We are writing in reply to your email of May 25, 2011, concerning our view on the application of subparagraph 152(4)(b)(iii) of the Income Tax Act (the "Act") to a hypothetical situation where, as a consequence of the wind-up of a Canadian subsidiary into its Canadian parent, the shares of a wholly-owned foreign subsidiary are distributed from the Canadian subsidiary to the Canadian parent. We apologize for the delay in our response.

In your inquiry, you stated that it is your view that, although the wind-up of the Canadian subsidiary into the Canadian parent does involve the distribution of the shares of a foreign subsidiary to the Canadian parent, there is no transaction between the Canadian parent and the foreign subsidiary and, consequently, paragraph 152(4)(b)(iii) does not apply. Furthermore, you have stated that our document 2000-0030737 may provide "soft comfort" that subparagraph 152(4)(b)(iii) of the Act should not apply to this hypothetical situation, as in your view there is no transaction between the Canadian parent and the foreign subsidiary.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings. As noted in paragraph 7 of IC 70-6R5, the Canada Revenue Agency ("CRA") will not provide an advance ruling on a completed transaction. Where a situation involves a specific taxpayer and a completed transaction, the request should be addressed to the relevant tax services office. Although we cannot comment on your specific situation we are prepared to provide the following comments in respect of the issues that you raised. Please note, however, that these comments are of a general nature and are not binding on the CRA.

Subparagraph 152(4)(b)(iii) of the Act permits the Minister to assess or reassess a taxpayer within three years after the end of the normal reassessment period, provided that the assessment is made "as a consequence of a transaction involving the taxpayer and a non-resident person with whom the taxpayer is not dealing at arm's length."

In the situation you have described, a Canadian subsidiary is wound-up into its Canadian parent and, as a result, the shares of the wholly-owned foreign subsidiary are distributed from the Canadian subsidiary to the Canadian parent. It is our view that there is no requirement in the subparagraph that the transaction in question be between the taxpayer and the non-arm's length non-resident person. Instead the provision requires that the assessment or reassessment is made as a consequence of a transaction "involving" the taxpayer and the non-resident person. It is our view that a wind-up that results in the distribution of the shares of a wholly-owned foreign subsidiary from a Canadian subsidiary to its Canadian parent, is such a transaction and subparagraph 152(4)(b)(iii) is applicable provided the assessment or reassessment is made "as a consequence" of that transaction.

The court has taken the view that a "direct" transaction between the taxpayer and the non-resident, non-arm's length person is not required in order for subparagraph 152(4)(b)(iii) to have application. In Shaw-Almex Industries Ltd. v The Queen [2009 TCC 538], the court held that the Minister could reassess pursuant to subparagraph 152(4)(b)(iii) with respect to a transaction involving the appellant, its foreign subsidiary and a foreign bank.

With respect to your comment in your inquiry that our document 2000-0030737 may provide support for your view that 152(4)(b)(iii) does not apply to the wind-up transaction, we do not agree. In that document, we stated, in reference to a potential Foreign Accrual Property Income assessment, that we do not consider the operation of section 91 of the Act as giving rise to a "transaction" involving a controlled foreign affiliate and its Canadian resident shareholders for the purposes of subparagraph 152(4)(b)(iii). The document went on to consider whether an assessment or reassessment of income described in section 91 could be considered to have been made "as a consequence" of the transaction whereby a resident of Canada contributed capital to a controlled foreign affiliate for the purposes of 152(4)(b)(iii) of the Act. In your case we do consider the winding-up of the Canadian subsidiary into the Canadian parent to "involve" the foreign subsidiary (i.e., as well as the Canadian parent and the Canadian subsidiary) for the purposes of subparagraph 152(4)(b)(iii). In order to determine whether any assessment or reassessment of the Canadian parent is made "as a consequence" of the wind-up, it would be necessary to analyse the income involved.

We trust that these comments will be of assistance.

Yours truly,

Terry Young, CA
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch