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: Interaction of Paragraph 95(2)(c) and Subsection 88(3) of the Income Tax Act (the "Act")
This is in reply to your letter dated March 17, 1993 concerning the interpretation of the above provisions of the Act in the following hypothetical example:
1) Canco, a company incorporated and resident in Canada, owns 100% of the outstanding shares of a foreign affiliate ("FA1") which in turn owns 100% of the outstanding shares of a second foreign affiliate ("FA2").
2) The original cost of the shares of FA1 to Canco, and of the shares of FA2 to FA1, is $100; the present fair market value of the shares of both FA1 and FA2 is $10,000.
3) FA1 incorporates a new foreign affiliate, FAX, and transfers the shares of FA2 to FAX on a share-for share exchange basis as contemplated by paragraph 95(2)(c) of the Act and claims a relevant cost base of $100 in respect of the shares of FA2 for the purposes of subparagraph 95(2)(c)(ii) of the Act.
FA1 receives no non-share consideration from FAX on the transfer.
4) As a final step, FA1 is liquidated in accordance with the provisions of subsection 88(3) of the Act.
In our view, subparagraph 95(2)(c)(ii) will determine the cost to FA1 of the shares of FAX on the share transfer referred to in 3) above to be $100 and subparagraph 95(2)(c)(iv) will determine the cost to FAX of the shares of FA2 also to be $100. In addition, it is our view that for the purposes of applying subsection 88(3) of the Act to the wind-up of FA1 described in 4) above, the "adjusted cost base to the disposing affiliate of the share" (i.e. the adjusted cost base of the shares of FAX held by FA1) referred to in paragraph 88(3)(a) of the Act would be $100 as was earlier determined by subparagraph 95(2)(c)(ii) of the Act.
We trust this is the information you require.
for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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