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 property that is deemed to have been disposed of by paragraph 88(3)(b) can be "excluded property" of the affiliate at the relevant time?
Reasons: Based on textual, contextual and purposive interpretation of the relevant provisions.
July 17, 2014
Re: Liquidation and Dissolution of Foreign Affiliate
We are writing in response to your e-mail message of June 17, 2014 in which you requested our view in reference to the interaction of the definition of "excluded property" in subsection 95(1) of the Income Tax Act (the "Act") and subsection 88(3) of the Act when there is a liquidation and dissolution of a foreign affiliate of a taxpayer.
The time referred to in the pre-amble to subsection 88(3) of the Act is the "time a taxpayer receives a property" from a foreign affiliate on the liquidation and dissolution of the affiliate. Where paragraph 88(3)(a) of the Act does not apply, paragraph 88(3)(b) provides that the property of the affiliate is deemed to have been disposed of "at that time" (i.e. the time referred to in the pre-amble) by the affiliate to the taxpayer for proceeds of disposition equal to the distributed property's fair market value.
The definition of "excluded property" in subsection 95(1) of the Act reads in part as follows:
"excluded property", at a particular time, of a foreign affiliate of a taxpayer means any property of the foreign affiliate that is
(a) used or held by the foreign affiliate principally for the purpose of gaining or producing income from an active business carried on by it,
Given that the property of the affiliate is deemed by paragraph 88(3)(b) of the Act to have been disposed of at the time the taxpayer receives the property, you question whether it could ever qualify as excluded property at that time under paragraph (a) of that definition in subsection 95(1) of the Act.
It is our view that property that is used or held by a foreign affiliate for the purpose of gaining or producing income from an active business immediately before its distribution on the liquidation and dissolution of the affiliate will be excluded property at the time of the deemed disposition described in paragraph 88(3)(b) of the Act. Accordingly, any taxable capital gain or allowable capital loss that arises when such property is deemed to have been disposed of by a foreign affiliate to a taxpayer pursuant to paragraph 88(3)(b) of the Act will not be included in the computation of variables B and E of the definition of "foreign accrual property income" in subsection 95(1) of the Act.
We trust this is satisfactory for your purposes.
Olli Laurikainen CPA, CA
Income Tax Rulings Directorate
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