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.
September 4, 1984
HEAD OFFICE Corporate Rulings Directorate Rick Campbell Ref: 7-3535 Tel: 993-6937
RE: Anomaly - Paragraphs 40(2)(e) and 53(1)(f.1)
This is further to your August 1, 1984 memorandum and our recent telephone conversation concerning the adverse tax consequences arising from the sale of capital property by a Canadian subsidiary corporation (Canco) of a U.S. parent to a Canadian branch (Branch) of a related U.S corporation.
The situation, as we understand it, is as follows:
1. Both Canco and Branch carry on business and are taxable in Canada.
2. Canco sells Branch capital property, bonds, for their market value of $8 million. Canco's cost was $10 million.
3. Under paragraph 40(2)(e), Canco's capital loss of $2 million is deemed to be $nil.
4. Because Branch is not a "taxable Canadian corporation", paragraph 53(1)(f.1) does not apply to allow Branch to add the $2 million deemed loss to its ACB.
5. If Branch were to hold the bonds to maturity, it would receive $10 million and with an ACB of $8 million, would have a capital gain of $2 million.
6. The bonds were later sold back by Branch to Canco at market which was close to $8 million. Again, ifheld to maturity, a $2 million capital gain will be taxed in the hands of Canco despite the fact that the bonds sold for $10 million were actually purchased for $10 million by Canco.
We see the anomaly and will bring it to the attention of Current Amendments Division by copy of this memorandum.
The above problem could arise in any type of business except perhaps that of life insurers subject to the special rules of section 138. In your case. Canco and Branch were general insurers in the XXXX group. We understand a number of foreign insurance companies operate subsidiaries and branches in Canada. The bonds sold were part of the insurer's investment portfolio and, as you pointed out, the transfer of investments between related insurers is common. You also advised that insurers usually purchase bonds when they are issued and hold them until maturity.
The XXXX officials toldyou they doubted that U.S. tax laws would recognize a loss in these circumstances.
We thank you for the information.
Chief Finance, Insurance & Leasing Section Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch
c.c. Current Amendments Division
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