1 March 1991 Ruling 900541 F - Liquidation of U.S. Corporation

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.

Subject: Liquidation of U.S. Corporation

This is in response to your memorandum of April 23, 1990 and subsequent correspondence wherein you requested advice as to the correct tax treatment of a transaction that you encountered during your audit of 24(1) 24(1) The salient facts as we understand them are:

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Where a non-resident company is a controlled foreign affiliate of a Canadian taxpayer, the taxpayer must report in his or her income a portion of the foreign accrual property income ("FAPI") earned by the affiliate pursuant to subsection 91(1) of the Act. 24(1)

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A dissolution also results in the disposition by the shareholders of their shares in the dissolved corporation.  Accordingly, a gain or loss must be computed.  An amount included in income in respect of a share of a controlled foreign affiliate by reason of subsection 91(1) of the Act is added to the adjusted cost base of such shares by virtue of paragraph 92(1)(a) of the Act. 24(1)

FAPI as defined in paragraph 95(1)(b) of the Act, includes only the portion of a capital gain that may reasonably be considered to have accrued after the foreign affiliate's 1975 taxation year. Accordingly, the amount added to the adjusted cost base of the shares of, pursuant to paragraph 92(1)(a) of the Act, in respect of the FAPI arising from the gain on the land, would presumably not be sufficient to increase the ACB of the shares up to their fair market value because the value of the shares would reflect the full fair market value of the land.  As a result, the disposition of the shares by the shareholders would likely trigger a gain approximately equal the difference in the value of the land on January 31, 1975 and its value on December 31, 1971 (i.e. V-day) less any liabilities assumed.  However, subsection 110.6(1) of the Act may be employed to offset all or part of such a gain.

Residency of 24(1)

The following material is presented for informational purposes only.  We are not suggesting that the Department challenge the residency of 24(1) as reported. 24(1) However, it could nevertheless have been found to be a resident of Canada prior to the coming into force of subsection 250(5) on the basis of the common law test of residency which is derived from English tax jurisprudence.  Under the common law test of residency, corporations are considered to be resident where the central management and control of the corporation actually abides.  As a general rule, the central management and control of a corporation is situated where the directors of the corporation meet and exercise control.  The fact that the property and business of the corporation are located in another jurisdiction may be irrelevant.  Similarly, the residence of the shareholders may be irrelevant to the determination of a corporation's residence since the control of a corporation rests with the directors even though the shareholders may have ultimate control over the corporation in that they elect the directors annually.  In addition, it may be the location at which the directors meet and exercise control rather than the directors' country of residence which determines the residency of a corporation.

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At that point, because the Canada-U.S. Income Tax Convention (1980) (the "Treaty") has a tie-breaker rule that provides that a company resident in both countries, would be resident in the country in which it was created (incorporated) for the purposes of the treaty 24(1) subsection 250(5) would have deemed 24(1) to also be a non-resident of Canada for the purposes of the Act.

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Date of Disposition of the Shares of 24(1)

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Number of Shareholders

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24(1) In any case, an assessment of the gain as FAPI may reduce or virtually eliminate any Canadian tax benefit the taxpayers may have otherwise enjoyed by virtue of having 24(1)

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