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.
CORPORATE MANAGEMENT TAX CONFERENCE ROUND TABLE
June 11, 1996
Paragraph 88(1)(d) and Pre-Change-of-Control Dividends
Corporation A acquires, in an arms's-length transaction, 100% of the issued and outstanding shares of Corporation B. Corporation B owns 100% of the issued and outstanding shares of Corporation C which owns shares in a number of subsidiary corporations. All of the corporations are taxable Canadian corporations. Corporation A wishes to wind-up Corporation B and step-up the cost base of the shares in Corporation C under paragraphs 88(1)(c) and (d) of the Act, and then cause Corporation C to wind-up and step-up the cost base of the shares of the various subsidiaries. In the years prior to the acquisition, Corporation C paid dividends to Corporation B which paid dividends to its shareholders, and the dividends were deductible under section 112 of the Act.
Will subparagraph 88(1)(d)(i.1) apply to reduce the amount of the "step-up" available to Corporation A by the dividends paid from Corporation C to Corporation B?
Subparagraph 88(1)(d)(i.1) can operate to reduce the amount of the "step-up" otherwise available on the wind-up of a subsidiary corporation by the amount of dividends received, on the shares of the subsidiary corporation, by the parent corporation or a corporation with which the parent was not dealing at arm's length. The Department's policy is to apply the arm's-length test at the time the dividends are paid. In the situation in question, at the time the dividends are paid from Corporation C to Corporation B both corporations dealt at arm's length with Corporation A.
In some situations, the postamble of paragraph 88(1)(d) (the "Postamble") can deem a parent corporation to not be dealing at arm's length with another corporation but that provision has no application to corporations acquired by the parent from a person with whom the parent was dealing at arm's length. In this case the shares of Corporation C were not acquired directly by Corporation A from an arm's-length party. The Department's position is, however, that a corporation, the control of which was acquired from an arm's-length party, is considered to have been acquired from that party.
Problems can arise, however, if a new company is inserted in the chain. Assume, for example, that after the acquisition of Corporation B, Corporation A rolls the Corporation B shares to a newly incorporated company ("Holdco") and that Corporation B and Corporation C will be wound up into Holdco. In that case, the deeming provision in the Postamble will come into play because Holdco acquired the shares of Corporation B from Corporation A - a company with which it did not deal at arm's length. The result would be that Holdco would be deemed to have been in existence and not to have dealt at arm's length with Corporation B and C from the time of formation of those corporations. Accordingly the dividends paid from Corporation C to Corporation B would reduce the amount of the "step-up" available to Holdco on the wind-up of Corporation B.
1.It should be noted that on June 20, 1996, after this forum was held, the Minister of Finance tabled in the House of Commons a Notice of Ways and Means Motion which included a new subsection 88(1.7), which would replace the existing paragraph 88(1)(d) Postamble and clarify that the test is whether control of the corporation is acquired from an arm's-length person, consistent with Revenue Canada's interpretation described above.
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