10 January 1990 Ministerial Correspondence 58894 F - Capital Loss from Shares Disposed of on Liquidation

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.

January 10, 1990

Re: Paragraph 40(2)(e) and  Subsection 84(9) of the  Income Tax Act (the "Act")

This is in reply to your letter of October 12, 1989 in which you asked us two questions about the above-mentioned provisions of the Act. To illustrate your questions you have provided us with the following hypothetical situation:

1)     Company A is a Canadian-controlled private corporation within the meaning assigned by paragraph 125(7)(b) of the Act.

2)     Company B, a U.S. Corporation, is a wholly-owned subsidiary of Company A and is, therefore, a controlled foreign affiliate of Company A within the meaning assigned by paragraph 95(1)(d) of the Act.

3)     The fair market value of Company B is estimated to be $100.

4)     Company A's adjusted cost base of the shares of Company B is $10,000.

5)     Company B has never paid any dividends.

6)     Company A intends to liquidate Company B into Company A under U.S. corporate law.

Your Questions

1)     Does subsection 84(9) of the Act apply to the disposal of Company B shares by Company A on the liquidation?

2)     Would paragraph 40(2)(e) of the Act apply to restrict the capital loss incurred by Company A on the Company B shares as a result of the liquidation?

Our Comments

The income tax consequences flowing from the wind-up or liquidation of a foreign affiliate are a result of the interaction of the relevant corporation law in the foreign jurisdiction with specific provisions of the Act. Providing that the relevant U.S. corporate law is similar to that found in Canada it is our opinion that Company B shares held by Company A are not disposed of "to a person" as a result of the liquidation. Consequently, we are of the view that Company A's shares of Company B have not been redeemed, acquired or cancelled by Company B as a result of the liquidation.  This being the case, subsection 84(9) would not apply to such a disposition. Accordingly, in the above circumstances, subject to the possible application of subsection 93(2) of the Act (which you have indicated would not apply), we are of the view that Company A's capital loss on the liquidation would not be denied by paragraph 40(2)(e) of the Act.

We trust this will be of assistance to you.

Yours truly,

for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch