30 May 2012 External T.I. 2012-0447961E5 - Winding-up-Carryover of Non-Capital Losses

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 in the circumstances described in two particular situations, the election provided in paragraph 88(1.1)(f) is available to a parent corporation.

Position: Not in the first situation. Yes in the second situation.

Reasons: Wording of the Act.

XXXXXXXXXX
2012-044796
U. Chalupa
(613) 957-2124

May 30, 2012

Dear XXXXXXXXXX,

Object: Paragraph 88(1.1)(f) – Winding-up – Carryover of Non-Capital Losses

This is in reply to your email dated May 14, 2012 in which you requested Canada Revenue Agency’s (hereinafter “CRA”) comments on the application of paragraph 88(1.1)(f) of the Income Tax Act (the “Act”) in two particular situations.

Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act.

1) Facts and Assumptions

Our understanding of the facts and assumptions is as follows:

Situation 1:

* Parentco is a taxable Canadian corporation within the meaning of subsection 89(1) and a Canadian-controlled private corporation (hereinafter “CCPC”) within the meaning of subsection 125(7).
* Parentco owns a subsidiary wholly-owned corporation (hereinafter “Subco”). Subco is a taxable Canadian corporation and a CCPC.
* Parentco and Subco both have a taxation year end of December 31.
* On May 1, 2012, Subco was wound up into Parentco under subsection 88(1).
A formal certificate of dissolution of Subco would be expected to be issued on October 31, 2012.
* For its taxation year ending on October 31, 2012, Subco would expect to realize a non-capital loss in the amount of $100,000 (hereinafter the “2012 Loss”).

Situation 2:

* The facts would be the same as in Situation 1, except that a formal certificate of dissolution of Subco would be expected to be issued on March 31, 2013.
* For its taxation year ending on December 31, 2012, Subco would expect to realize a non-capital loss in the amount of $100,000 (the “2012 Loss”).
* For its taxation year ending on March 31, 2013, Subco would expect to realize a non-capital loss in the amount of $30,000 (hereinafter the “2013 Loss”).

2) Questions

In the circumstances described in Situation 1, you asked whether Parentco would be entitled to deduct the 2012 Loss in its taxation year ending December 31, 2012, if it elects under paragraph 88(1.1)(f).

In the circumstances described in Situation 2, you asked in which taxation year Parentco would be entitled to deduct the 2012 Loss and the 2013 Loss.

3) Our comments

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 income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. The particular situation outlined in your letter appears to be a factual one, involving specific taxpayers and completed transactions. However, we offer the following general comments.

First, it should be noted that our comments are limited to the interpretation of the potential application of paragraph 88(1.1)(f) in the context of the scenarios described above and that we assumed that all other requirements set out in subsection 88(1.1) are satisfied.

Situation 1:

For the purpose of computing the taxable income of Parentco under Part I for any taxation year commencing after the commencement of the winding-up, Subco’s 2012 Loss would be deemed, pursuant to paragraph 88(1.1)(c), to be Parentco’s non-capital loss for its 2012 taxation year (the taxation year of the parent in which the subsidiary’s loss year ended). Thus, pursuant to subsection 88(1.1) and paragraph 111(1)(a), Parentco would be entitled to deduct the 2012 Loss in its taxation year beginning January 1st, 2013 and ending December 31, 2013 (i.e. the taxation year commencing after the commencement of the winding-up).

In the circumstances described in Situation 1, the election in paragraph 88(1.1)(f) would not be available for Parentco as no portion of a loss of the subsidiary would be deemed by paragraph 88(1.1)(c) to be a loss of the parent for a “particular taxation year” beginning after the commencement of the winding-up. In Situation 1, the “particular taxation year” would begin on January 1st, 2013 and the non-capital loss of Subco would be deemed to be a loss of Parentco for its 2012 taxation year, not its 2013 taxation year.

Situation 2:

For the purpose of computing the taxable income of Parentco under Part I for any taxation year commencing after the commencement of the winding-up, Subco’s 2012 Loss would be deemed, pursuant to paragraph 88(1.1)(c), to be Parentco’s non-capital loss for its 2012 taxation year (the taxation year of the parent in which the subsidiary’s loss year ended). Paragraph 249(2)(a) provides that a reference in the Act to a taxation year ending in another year includes a reference to a taxation year ending coincidentally with that other year. Thus, pursuant to subsection 88(1.1) and paragraph 111(1)(a), Parentco would be entitled to deduct the 2012 Loss in its taxation year beginning January 1st, 2013 and ending December 31, 2013 (i.e. the taxation year commencing after the commencement of the winding-up).

In the circumstances described in Situation 2, the election in paragraph 88(1.1)(f) would not be available for Parentco with respect to the 2012 Loss as no portion of such loss would be deemed by paragraph 88(1.1)(c) to be a loss of the parent for a particular taxation year beginning after the commencement of the winding-up.

For the purpose of computing the taxable income of Parentco under Part I for any taxation year commencing after the commencement of the winding-up, Subco’s 2013 Loss would be deemed, pursuant to paragraph 88(1.1)(c), to be Parentco’s non-capital loss for its 2013 taxation year (the taxation year of the parent in which the subsidiary’s loss year ended). Thus, but for paragraph 88(1.1)(f) and pursuant to subsection 88(1.1) and paragraph 111(1)(a), Parentco would be entitled to deduct the 2013 Loss in its taxation year beginning January 1st, 2014 and ending December 31, 2014.

It should be noted that paragraph 111(1)(a) does not permit a deduction of a non-capital loss in the year in which it is incurred.

However, where under paragraph 88(1.1)(c), a subsidiary’s non-capital loss is deemed to be a non-capital loss of the parent for a particular taxation year of the parent beginning after the commencement of the winding-up (the 2013 taxation year), the parent may elect under paragraph 88(1.1)(f) to treat the particular loss as having arisen in its preceding taxation year (the 2012 taxation year). If this election is made, Parentco would be entitled to deduct the 2013 Loss in its taxation year ending December 31, 2013 pursuant to paragraph 111(1)(a).

The above comments represent our general view with respect to the subject matter and are not binding on the CRA, as explained in paragraph 22 of Information Circular 70-6R5.

We trust that our comments will be of assistance.

Yours truly,

Stéphane Prud’Homme, LL.B, M. Fisc.
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch