15 November 1989 Income Tax Severed Letter AC58938 - Meaning of "On the Winding-up" - "Wound Up"

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.

5-8938
                                        K.S.A.C.Astaphan
                                        (613) 957-2119

Dear Sirs:

Re: Subsection 88(1) of the Income Tax Act (Canada) (the "Act") - Meaning of "On the Winding-up" - "Wound-Up"

This is in response to your letter of October 13, 1989 wherein you requested our opinion as to the availability of the paragraph 88(1)(c) "bump" and the timing of the designation in respect thereof in the hypothetical fact situation referred to below.

Facts

The hypothetical facts, as we understand them, are as follows:

1. A and B are companies incorporated under the laws of the Province of British Columbia.

2. A is a subsidiary of B. B owns 100% of all shares issued and outstanding of A.

3. A's assets consist of cash and non-depreciable capital property.

4. The non-depreciable capital property was acquired by A prior to the sale of A's shares to B and has been owned continuously since B acquired A's shares.

5. The current fair market value (FMV) of A's non-depreciable capital property is in excess of the cost of the assets to A.

6. A will be wound up into B under subsection 88(1) of the Act.

7. The assets of A will be transferred to B upon the commencement of the wind up.

8. The dissolution of A will take place nine months after the commencement of the winding-up and in the taxation year following that in which the winding-up is commenced.

Opinion Requested

You request our opinion whether the bump calculated under paragraph 88(1)(d) of the Act would be available to be applied in calculating the cost of non-depreciable capital assets transferred from A to B and whether the designation of the bump amount could be made in either taxation year occurring over the winding-up period.

Your Observations

You believe that the cost to B of the non-depreciable capital assets would be determined under paragraph 88(1)(c) of the Act and would be calculated using the available portion of the "bump" amount calculated under paragraph 88(1)(d) of the Act.

You note our opinion (as stated in IT-l26R, "Meaning of Winding-up") that "on the winding-up", as used in paragraph 88(1)(d) of the Act, means the period of time during which the winding-up takes place. You note that the amount of "bump" available to be used in determining the cost base to 8 of non-depreciable capital property transferred from A is to be determined under paragraph 88(1)(d) and that the "bump" is available for assets transferred "on the winding-up".

Your interpretation of paragraph 88(1)(d) and your understanding of IT-l26R lead you to the conclusion that the 9-month period between the beginning of the winding-up and the dissolution of company A is the period referred to in IT-126R as "on the winding-up" and, as such, the bump calculated under paragraph 88(1)(d) would be available to be applied against the non-depreciable capital assets of A.

You note that paragraph 88(1)(d) also states that the amount of the bump that can be added to the cost base of the non-depreciable capital asset is the amount "designated by the parent in respect of that capital property in its return of income under this part for its taxation year in which the subsidiary was so wound up." In the hypothetical situation, the period between the commencement of the winding-up and the dissolution would include a taxation year-end of the parent.

Our Opinion

As indicated to your Mr. Astaphan in a telephone conversation on November 2, 1989 ((19(1)/Astaphan), the Department's views as to when a corporation is considered to have been wound-up are described in IT-126R2 , particularly in paragraphs 3 to 5 thereof.

As such, A would be considered to be wound up for the purposes of subsection 88(1) where, in the absence of a formal dissolution, there is substantial evidence that A will be dissolved within a short period of time. Evidence confirming the proposed dissolution would generally include an application for dissolution or for surrender of A's charter under its incorporating statute and evidence that the requirements for dissolution under that statute have been met.

In our opinion (i) the hypothetical facts would not result in the "bump" not being available and (ii) the designation under paragraph 88(1)(d) must be made in B's taxation year in which A is wound up, as described above.

The above comments are expressions of opinion and, as stated in Information Circular 70-6R, are not binding on Revenue Canada, Taxation.

Yours truly,

for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch