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 152(4)(b)(iii) applies to extend the period the Minister may make an assessment, reassessment or additional assessment in a situation where the shares of a foreign subsidiary are sold to the Canadian sister company by the Canadian subsidiary. The reassessment of the Canadian subsidiary results in an increase in the capital gain reported by the Canadian subsidiary on the sale of the shares, and a decrease to the deduction provided by 93(1) as there is insufficient exempt surplus.
Position: Yes.
Reasons: The sale of the shares of a foreign subsidiary wholly owned by a Canadian subsidiary to the Canadian sister company would result in the disposition of the shares of the foreign subsidiary held by the Canadian subsidiary, to the Canadian sister company. In our view this is a transaction involving the Canadian subsidiary and the foreign subsidiary, a non-resident person with whom the Canadian subsidiary 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. Based on the information provided, the reassessment in this situation involves the adjustment of the fair market value of the foreign subsidiary's shares in the calculation of the Canadian subsidiary's capital gain on the sale of the shares of the foreign subsidiary. Therefore it follows that the reassessment was made as a consequence of the transaction involving the Canadian subsidiary and the foreign subsidiary, and the provisions of 152(4)(b)(iii) are applicable.
April 22, 2013
International Tax Division HEADQUARTERS
Laval Tax Service Office Income Tax Rulings
Directorate
Attention: Cathy Taillefer Gillian Godson
2013-047812
Application of Subparagraph 152(4)(b)(iii)
We are writing in reply to your email of February 13, 2013, requesting our views on the application of subparagraph 152(4)(b)(iii) of the Income Tax Act (the "Act") to a situation where the shares of a wholly-owned foreign subsidiary are sold by a Canadian subsidiary to a Canadian sister company.
Our Comments
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 sold the shares of the wholly-owned foreign subsidiary to a Canadian sister company. Through a series of other transactions the shares of the foreign subsidiary are ultimately sold to the non-resident parent and, as a result, the shares of the wholly-owned foreign subsidiary are distributed from the Canadian subsidiary to the non-resident parent. However, the transaction that is the focus of your inquiry is the sale of the shares of the foreign subsidiary from a Canadian subsidiary to a Canadian sister company.
As noted in our document 2011-040773, it is our view that there is no requirement in subparagraph 152(4)(b)(iii) that the transaction in question be between the taxpayer and the non-arm's length non-resident person. The provision requires that the assessment or reassessment is made as a consequence of a transaction "involving" the taxpayer and the non-resident person. In that regard, it is our view the sale of the shares of a wholly-owned foreign subsidiary from a Canadian subsidiary to its Canadian sister company 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.
In your inquiry you have indicated that the proposed reassessment of the Canadian subsidiary would be made as a result of an audit adjustment, which increases the reported fair market value of the shares of the foreign subsidiary and therefore increases the capital gain reported on the sale of the shares to the Canadian sister company. In that regard, it is our view that the proposed reassessment of the Canadian subsidiary is a consequence of the sale of the shares of the foreign subsidiary to the Canadian sister company. Accordingly the reassessment is a consequence of a transaction involving the taxpayer and the non-resident non-arm's length person, and the provisions of subparagraph 152(4)(b)(iii) are applicable in this situation.
We trust that these comments will be of assistance.
Yours truly,
Terry Young, CPA, CA
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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