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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
XXXXXXXXXX 940244
Attention: XXXXXXXXXX
February 18, 1993
Dear Sirs/Madams:
Re: Subsection 88(1) of the Income Tax Act (the "Act")
We are writing in response to your letter of January 26, 1994 wherein you requested a technical interpretation as to whether subsection 88(1) of the Act would apply on the winding-up of a taxable Canadian corporation, within the meaning of paragraph 89(1)(i) of the Act, in the situation outlined below.
XCo is a taxable Canadian corporation without share capital. It was a non-profit organization, within the meaning assigned by paragraph 149(1)(l) of the Act, before it amended its by-laws to allow distribution of its assets to its members. At the time its by-laws were amended, XCo ceased to be a non-profit organization and became a taxable Canadian corporation. The provisions of subsection 149(10) of the Act applied at the time that XCo ceased to be a non-profit organization.
A taxable Canadian corporation ("Profitco") owned by the members of XCo proposes to become a member of XCo. After Profitco becomes a member of XCo, all the existing members of XCo will withdraw their membership and Profitco will be the sole member of XCo.
XCo will then be wound up into Profitco such that all of XCo's assets and liabilities will be distributed to Profitco, which will carry on XCo's business on a profitable basis.
The situation described in your letter appears to involve seriously contemplated transactions and identifiable taxpayers. Consequently, we would like to bring your attention to paragraph 21 of Information Circular 70-6R2, dated September 28, 1990, issued by Revenue Canada, Customs, Excise and Taxation wherein it is stated that when a requested interpretation relates to a contemplated transaction, a taxpayer should request an advance income tax ruling rather than an opinion. The procedures for requesting an advance income tax ruling are set out in paragraph 15 of the said circular. We are, however, able to provide you with the following general comments.
Subsection 88(1) of the Act contemplates the winding-up of one taxable Canadian corporation ("the first corporation") into another taxable Canadian corporation ("the second corporation") where not less than 90% of the issued shares of each class of the capital stock of the first corporation were, immediately before the winding-up, owned by the second corporation. Consequently, in our opinion, the winding-up of a corporation with no share capital would not meet the requirement of subsection 88(1) of the Act and that subsection would not apply.
The Department's view regarding the winding-up of a corporation without share capital is stated in paragraphs 9 and 11 of Interpretation Bulletin IT-409, dated February 27, 1978. Although the bulletin is titled "Winding-up of a Non-Profit Organization", the comments in paragraphs 5, 9 and 11 of that bulletin are also relevant to the winding-up of a taxable Canadian corporation without share capital. On the winding-up of a corporation without share capital, subsection 69(5) of the Act would apply and the shareholders (defined in subsection 248(1) of the Act to include members or other persons entitled to receive payment of a dividend) would be considered to have disposed of their interest in the corporation and to have received proceeds of disposition equal to the fair market value of the property distributed to them on the winding-up of the corporation.
We offer no comments on any other tax consequences which may arise as a result of the transactions outlined in your letter. However, on the assumption that the assets of XCo have value, subsection 69(1) or other anti-avoidance provisions, such as subsection 56(2) of the Act, may apply if the existing members of XCo do not receive reasonable consideration for their interests in XCo.
Yours truly,
for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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