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.
Principal Issues: 1) Would recaptured depreciation and other income arising on the disposition of all the assets of an active business be included in computing the adjusted earnings amount for the purposes of computing the affiliate's surplus accounts.
Position: Yes to the extent such income is not included in "earnings" of the affiliate under subsection 5907(1) of the Regulations, such amounts net of terminal and other losses would be included in the adjusted earnings amount pursuant to the broad wording of paragraph 5907(2)(f).
Reasons: Position consistent with other interpretations of similar wording.
982764
XXXXXXXXXX Olli Laurikainen
(613) 957-2116
Attention: XXXXXXXXXX
November 13, 1998
Dear Sirs:
Re: Section 5907 of the Regulations to the Income Tax Act
This is in reply to your request for technical interpretation concerning the application of the above provision in the following hypothetical situation.
1) Canco is a corporation resident in Canada.
2) Canco owns 100% of the shares of a foreign affiliate (“Usco1”) resident in the United States.
3) Usco1 owns 100% of the shares of a second foreign affiliate (“Usco2”) resident in the United States.
4) Usco2 carries on an active business in the United States and Usco1 and Usco2 file their tax returns in the United States on a consolidated basis. All of Usco2’s assets are used in the active business.
5) Forco is a corporation resident in the United States that is not related to Canco.
6) Forsub is a wholly-owned subsidiary of Forco resident in the United States.
7) Usco2 sells the beneficial ownership in all of its active business assets to Forsub for fair market value consideration but retains legal title thereto.
8) On the day following the transaction described in paragraph 7 above, Usco1 sells the shares of Usco2 to Forco for fair market value consideration. Usco2 has a year end for U.S. tax purposes at the time its shares are transferred to Forco.
9) On the day seven days following the transaction described in paragraph 7 above, Forco will cause Forsub and Usco2 to merge in a transaction whereby Usco2 survives the merger and Forsub ceases to exist.
10) The purpose for carrying out the transfers as described above is to obtain the consequences that flow under the IRS Code and the Act from a fair market value asset transfer.
It is our view that in the above circumstances, the exempt surplus or exempt deficit, taxable surplus or taxable deficit and underlying foreign tax as defined in subsection 5907(1) of the Regulations to the Act (the “Regulations”) of Usco2, would, for the purposes of an election made by Canco under subsection 93(1) of the Act in respect the proceeds of the disposition to Usco1 of the shares of Usco2 arising as a result of the transaction described in paragraph 8 above, include the earnings or loss and capital gains or capital losses of Usco2 for the year ended at the time of the disposition. To the extent such income is not otherwise included in the earnings of Usco2 determined under subparagraph (a)(i) of the definition of “earnings” in subsection 5907(1) of the Regulations, recaptured depreciation net of any terminal losses (but not including any capital gain or capital loss) and other income resulting from the disposition would be added to the earnings amount of Usco2 for that year from an active business pursuant to subsection 5907(2) of the Regulations. In referring to “recaptured depreciation”, we mean the amount by which the proceeds of disposition in respect of a particular asset which is depreciable under the IRS Code exceeds the amount by which its cost exceeds the aggregate depreciation claims made in respect of such asset pursuant to the IRS Code. In referring to “terminal losses” we mean the amount by which the cost of a particular depreciable asset less the aggregate of depreciation claims made in respect of such asset under the IRS Code, exceeds the proceeds of disposition of such asset.
The foregoing comments are given in accordance with the practice referred to in paragraph 22 of information Circular 70-6R3 and are not binding on Revenue Canada.
We trust this is the information you require.
Yours truly,
for Director
Reorganisations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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