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.
XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs:
RE: Wind-up of corporation owning Canadian Resource Property
This is in reply to your letter of February 1, 1993 wherein you requested a technical interpretation concerning a number of questions arising in the above circumstances.
You have described a situation where the facts are as follows:
- A parent company ("Parentco") owns all the issued shares of a subsidiary company ("Subco").
- Each of Parentco and Subco is a taxable Canadian corporation ("TCC"), within the meaning assigned that phrase in paragraph 89(1)(i) of the Income Tax Act (the "Act").
- Subco's only asset is a Canadian resource property (the "CRP"), within the meaning assigned that phrase in paragraph 66(15)(c) of the Act, which has a fair market value ("FMV") of $XXXXXXXXXX
- Parentco has a loan receivable from Subco (the corresponding loan payable representing Subco's only liability) which has a face value of $XXXXXXXXXX but an adjusted cost base ("ACB"), within the meaning assigned that phrase in paragraph 54(a) of the Act, of nil.
- The ACB to Parentco of the loan receivable from Subco was reduced in prior years as a consequence of the renunciation of resource expenditures by Subco at a time when it was a joint exploration corporation, within the meaning assigned that phrase in paragraph 66(15)(g) of the Act.
- Subco is wound up into Parentco.
- Prior to the winding-up of Subco, control of Parentco (and Subco) was acquired such that the provisions of subsection 66.7(10) of the Act applied to deem each of Parentco and Subco to be a "successor".
- Parentco had cumulative Canadian development expense ("CCDE"), within the meaning assigned that phrase in paragraph 66.2(5)(b) of the Act, in the amount of $XXXXXXXXXX from the acquisition of other resource property prior to the above acquisition of control.
You have asked the following questions with regard to this situation:
1. Is the loan payable by Subco to Parentco considered to have been settled or extinguished on the winding-up of Subco for payment of nil proceeds, or is it considered to have been settled or extinguished for payment of $XXXXXXXXXX the FMV of Subco's CRP? (You have noted that the application of the rules found in subparagraph 88(1)(a)(i) of the Act would result in Subco being deemed to have disposed of the CRP, distributed by it to Parentco on the winding-up, for proceeds equal to nil.)
2. If Parentco subsequently sells the CRP distributed to it on the winding-up of Subco for $XXXXXXXXXX would the provisions of subsection 88(1.5) of the Act entitle Parentco to apply this $XXXXXXXXXX of proceeds against its $XXXXXXXXXX of "successored" CCDE?
Our Comments:
Since the transactions described in your letter would appear to relate to a situation involving actual taxpayers, we are unable to provide specific comments as to the income tax consequences arising as a result thereof. Assurances concerning such consequences are only provided through advance income tax rulings, issued under the guidelines detailed in Information Circular 70-6R2 and the Special Release thereto dated September 30, 1992, concerning proposed transactions. We will, however, provide our general views with regard to the issues raised above.
Where a TCC has been wound up and immediately before the winding-up all of the issued shares of its capital stock were owned by another TCC, subject to the provisions of subsection 69(11) of the Act, the rules contained in subsection 88(1) thereof will apply. Interpretation Bulletin IT-126R contains comments as to when, in our view, a corporation is considered to have been "wound up".
Subject to the exclusions contained therein, the provisions of subsection 80(1) of the Act may apply where inter-company debt is settled or extinguished without any payment by the debtor, or by the payment by the debtor of an amount less than the principal amount (within the meaning assigned that term in subsection 248(1) of the Act) of such debt, as a consequence of the winding-up of a corporation.
Whether or not a payment by the debtor has occurred, as well as the quantum of any such payment, upon such a settlement or extinguishment is a question of fact to be determined from the circumstances of a particular situation, i.e., with reference to any agreements or other documentation concerning the winding-up under consideration.
Where the rules in subsection 88(1) of the Act applied to the winding- up, an election may be available to the "parent" under subsection 80(3) of the Act provided the inter-company debt between "parent" and "subsidiary" was settled or extinguished on the winding-up without any payment or by the payment of an amount that is less than both the principal amount of the debt and the cost amount (determined without reference to paragraph (e) of the definition thereof contained in subsection 248(1) of the Act) to the creditor of the debt immediately before the winding-up.
However, as discussed in paragraph 6 of Interpretation Bulletin IT-142R3, a valid election under subsection 80(3) of the Act will not prevent the application of the provisions of subsection 80(1) thereof to a debtor with respect to the amount, if any, by which the principal amount of the debt to the debtor exceeds its cost amount to the creditor.
Pursuant to the provisions of subsection 88(1.5) of the Act, where the rules in subsection 88(1) thereof applied to the winding-up of the "subsidiary", the "parent" will be deemed to be the same corporation as and a continuation of the "subsidiary" for certain specified purposes, which include the provisions of subsection 66.7 of the Act. In addition, where a CRP is acquired by way of a winding-up to which subsection 88(1.5) of the Act applies, subsection 29(25) of the Income Tax Application Rules, 1971 (the "ITARS") and subsections 66.7(1) to 66.7(5) of the Act do not apply in respect of that CRP pursuant to the provisions of subsection 66.7(6) thereof.
In our view, the provisions of subsection 66.7(6) of the Act would prevent the application of the provision of the ITARS and the provisions of the Act referred to in the previous sentence from arising as a result of the acquisition of a CRP by way of a wind-up to which subsection 88(1.5) of the Act applies. However, it is also our view that, since pursuant to the provisions of that latter subsection of the Act the "parent" would be deemed to be the same corporation as and a continuation of the "subsidiary" for the purposes of subsection 66.7 of the Act, if the provisions of subsection 66.7(10) thereof had previously applied to deem the "subsidiary" to be a "successor" in respect of a particular CRP, then the "parent" would also be a "successor" in respect of that CRP notwithstanding the provisions of subsection 66.7(6) of the Act.
If the CRP so acquired from the "subsidiary" was a property described in subparagraph 66(15)(c)(ii), (v) or (vi) or a right to or interest in such property, i.e., a mineral resource property, it is our view that the proceeds received by the "parent" on a sale of such property after the wind-up could be sheltered by successored CCDE of the "parent" pursuant to the provisions of clause 66.2(5)(b)(v)(B).
The determination of what other provisions of the Act may be relevant, e.g., anti-avoidance provisions such as subsections 69(11) or 245(2) of the Act, in a particular situation involving the winding-up of a corporation is also a question of fact which would have to be resolved based upon consideration of all of the facts relevant to that particular situation.
The foregoing comments represent our general views with respect to the issues raised in your letter. The facts of a particular situation may lead to a different conclusion. In accordance with paragraph 21 of Information Circular 70-6R2 the comments expressed herein do not constitute an advance income tax ruling and consequently are not binding on Revenue Canada, Customs, Excise and Taxation.
Yours truly,
for Director Manufacturing Industries, Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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