31 October 2011 External T.I. 2011-0422981E5 F - Whether property is eligible for a bump

Unedited CRA Tags

88(1)

View modes

Translation

Translation disclaimer

This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.

31 October 2011 External T.I. 2011-0422981E5 F - Whether property is eligible for a bump

Principal Issues: 1. A parent would incorporate a corporation (the "subsidiary"). The subsidiary would acquire marketable securities. The parent would sell all the shares of the capital stock of the subsidiary to his child who would sell them afterwards to the parent corporation. At what time would the parent corporation be deemed to have last acquired control of the subsidiary for the purposes of the bump rules?

2. Would the marketable securities be eligible for a bump under paragraph 88(1)(c) if they are acquired a few hours or a few months after the time at which the parent would acquire control of the subsidiary?

3. If the marketable securities are transferred by the parent to the subsidiary and, as consideration for that transfer, the parent acquires shares of the subsidiary and, at the same time, control of the subsidiary (in a case, for example, where the parent would not have been the incorporator of the corporation), would the marketable securities be eligible for the bump under paragraph 88(1)(c)?

Position: 1. At the time the parent would acquire control of the subsidiary, that is at the time of its incorporation if the parent is the incorporator.

2. The marketable securities would not be eligible for the bump under paragraph 88(1)(c).

3. No. The marketable securities would be "ineligible property" under subparagraph 88(1)(c)(v).

Reasons: 1. Wording of paragraph 88(1)(d.2).

2. The marketable securities would not be held at the time the parent would acquire control of the subsidiary.

3. Wording of subparagraph 88(1)(c)(v).

XXXXXXXXXX
				2011-042298
				Sylvie Labarre, CA

October 31, 2011

Dear Sir,

Subject: Increase in the cost of a property during a winding-up

This is in response to your e-mail of September 29, 2011 in which you requested our opinion regarding the application of paragraphs 88(1)(c) and (d) of the Income Tax Act (the "Act") in the hypothetical situations described below.

Unless otherwise indicated, all statutory references are to provisions of the Act.

Base Hypothetical Situation

1. In XXXXXXXXXX 2000, an individual ("Parent") incorporated a holding corporation ("Parentco") by injecting $XXXXXXXXXX through a subscription for voting and participating shares in the capital stock of Parentco.

2. A few months after the share subscription, Parentco acquired marketable securities with a value of $XXXXXXXXXX.

3. In 2010, Parent sold all the shares of the capital stock of Parentco to his child for a cash consideration of $XXXXXXXXXX. Parent was taxed on the gain realized on the sale of the shares because he was not entitled to a deduction described in section 110.6.

4. At the time of the sale described in 3 above, the fair market value ("FMV") of the marketable securities was $XXXXXXXXXX. At that time, those marketable securities were the only asset of Parentco, which had no debt.

5. Shortly after acquiring the shares of the capital stock of Parentco, the child formed the child’s own holding corporation ("Childco") and transferred all the previously-acquired shares of the capital stock of Parentco in consideration for a $500,000 demand promissory note.

6. Parentco was then wound up into Childco and the rules in subsection 88(1) applied.

7. At the time of the winding-up, marketable securities valued at $XXXXXXXXXX were Parentco's only assets. Parentco had no debt and paid no dividend to Childco.

Questions

(a) Could Childco increase the cost of the marketable securities by $XXXXXXXXXX in order to obtain an adjusted cost base ("ACB") of $XXXXXXXXXX in applying the rules in paragraph 88(1)(d)?

(b) For the purposes of paragraphs 88(1)(c) and (d), when would Childco be deemed to have acquired control of Parentco for the last time?

(c) If marketable securities had been acquired by Parentco on the same day as Parent's subscription for shares of the capital stock of Parentco (for example, a few hours after subscription), would the answer to (a) be different?

(d) If Parent had acquired the shares of Parentco in consideration for the transfer of the marketable securities, would the answer to (a) be different?

(e) Instead of issuing voting and participating shares only to Parent in XXXXXXXXXX 2000, Parentco issue XXXXXXX% of the voting and participating shares of its share capital to Parent for consideration of $XXXXXXXXXX and XXXXXXXXXX% of the voting and participating shares of its capital stock to an unrelated third party for consideration of $XXXXXXXXXX. In 2010, the fair market value of the capital stock of Parentco was $XXXXXXXXXX and the child acquires all of those shares by paying $XXXXXXXXXX and $XXXXXXXXXX to an unrelated third party. Would the answers to the previous questions differ based on these new assumptions?

Our Comments

As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (the "CRA") not to issue a written opinion regarding proposed transactions otherwise than by advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.

In certain circumstances, the cost of a subsidiary’s property distributed to the parent on a winding-up is deemed to be the deemed proceeds of disposition under paragraph 88(1)(a) plus the amount determined under paragraph 88(1)(d) in respect of that property pursuant to paragraph 88(1)(c).

However, not all property can benefit from such an increase. The property distributed to the parent must be a capital property other than an ineligible property of the subsidiary at the time that the parent last acquired control of the subsidiary and was owned by the subsidiary thereafter without interruption until such time as it was distributed to the parent corporation on the winding-up.

Response to Questions (a) and (b)

In your base hypothetical situation, it should first be determined whether the marketable securities were capital property. Next, the holding period of each capital property (each investment) must be determined in order to establish whether that property was owned by the subsidiary at the time the parent corporation last acquired control of the subsidiary and thereafter without interruption until such time as it was distributed to the parent corporation.

A review of the conditions under paragraph 88(1)(c), including the holding period test, must be done with respect to each investment and not on an aggregated basis for everything that was grouped under the heading "marketable securities" in the balance sheet.

For the purposes of paragraphs 88(1)(c), (d) and (d.2), paragraph 88(1)(d.2) is deemed to determine "the time the parent corporation last acquired control” where control of the subsidiary was acquired from another person or group of persons with whom the acquirer was not (otherwise than solely because of a right referred to in paragraph 251(5)(b)) dealing at arm's length. In your hypothetical base situation, Childco acquired the control of Parentco from the child, who was not dealing at arm's length with it. Furthermore, the child acquired the control of Parentco from Parent with whom the child was not dealing at arm's length. Consequently, for purposes of paragraphs 88(1)(c) and (d), the time that Childco last acquired the control of Parentco was deemed to be the time when Parent acquired the control of Parentco.

The time when Parent acquired control of Parentco could be before the issuance of the voting and participating shares of Parentco in XXXXXXXXXX 2000, being the time of the incorporation of Parentco, if Parent was the incorporator. The incorporator of a new corporation generally acquires its control at the moment of its incorporation if no share is issued at that time. This is reflected in our position expressed, inter alia, in the following technical interpretations: Nos. 9626315, 9700405, 9801425 and 2002-0118145.

In your base hypothetical situation, the marketable securities which were acquired several months later would not be eligible for the bump of 88(1)(d) given that they did not belong to Parentco at the time of the acquisition of control of Parentco by Parent (being when Parentco was incorporated if Parent was the incorporator or otherwise when the first issuance of shares occurred in XXXXXXXXXX 2000).

Response to Question (c)

The response to Question (c) would not be different from that given to Question (a) if the marketable securities were acquired several hours after the time when the control of Parentco was acquired by Parent since the marketable securities could not belong to the subsidiary at the time of its incorporation.

Response to Question (d)

If the time when Parentco's control was acquired by Parent was the time that Parentco was incorporated because Parent was the incorporator, the answer to Question (d) would not be different from that given for question a) since the marketable securities could not belong to the subsidiary at the time of its incorporation.

On the other hand, if the time when Parent acquired control of Parentco was not the time of incorporation but the time of the first issuance of shares (for example, if Parentco was a "shelf" company and had, therefore, been incorporated by a third party unrelated to Parent not acting as Parent's agent), the marketable securities that would have been transferred in consideration for the initial issuance of Parentco's share capital would be owned by Parentco at the time that it was last deemed to have acquired control of Parentco under paragraph 88 (1) (d.2). In addition to determining (as noted above) whether each investment is a capital property, it would then be necessary to determine whether that investment had been owned by the subsidiary continuously from that time until Parentco's distribution of that investment to Childco on the winding-up. It would also be necessary to consider whether each investment is ineligible under subparagraphs 88(1) (c)(iv) to (vi).

In the situation where Parent was not considered to have acquired control of Parentco on the incorporation of Parentco and the marketable securities belonged to Parentco at the time when Parent acquired the control of Parentco, subparagraph 88(1)(c)(v) would apply if the assumptions you described in your request are taken into account, as modified by those stated in question (d). In such a situation, the marketable securities would have been acquired by Parentco from a person (Parent) who did not deal at arm's length with Childco (pursuant to subsection 88 (1.7)) other than by reason of a right referred to in paragraph 251(5)(b) where the acquisition was made as part of a series of transactions or events in which Childco had last acquired control of Parentco. We are of the view that, in such a situation, the presumption in subsection 88(1)(d.2) (which brings Parentco's acquisition of control of Childco back to the time Parent acquired control of Parentco) would make it necessary to consider whether the acquisition of marketable securities was part of the same series of transactions or events as the issuance of shares of the capital stock of Parentco to Parent. Given that the acquisition of the marketable securities was made in consideration for this issuance of shares, it is difficult to consider that this acquisition was not part of the same series of transactions or events as the acquisition of control of Parentco by Parent. Consequently, the marketable securities transferred to Parentco in consideration for the issuance of the shares of Parentco appear to us to constitute ineligible property by virtue of subparagraph 88(1)(c)(v).

With respect to the foregoing, we are of the view that subsection 88(1.7) applies to deem Parent to not deal at arm's length with Childco even if they did not co-exist given that Parent did not deal at arm's length with Childco before the winding-up.

Furthermore, even if subparagraphs 88(1)(c)(iv) to (vi) did not apply to a particular situation and even if all the conditions for obtaining the bump in cost, provided for in 88(1)(d), were satisfied, the increase in the cost of the investments would be limited to the amount described in subparagraph 88(1)(d)(ii). Thus, the bump amount would be limited to the amount, if any, by which the FMV of the capital property at the time at which Childco last acquired the control of Parentco over the cost amount of that property to Parentco immediately before the winding-up.

Consequently, under the base assumptions as modified by Question (d), it is not be possible to add an amount to the amount calculated under subparagraph 88(1)(c)(ii) as a cost, for the parent corporation (Childco), to each property of the subsidiary (Parentco) distributed to the parent corporation upon winding-up.

Response to Question (e)

Based on the assumptions stated in Question (e), we understand, according to the facts, that the person who acquired control of Parentco was always Parent, whether upon the incorporation of Parentco, or upon the issuance of the voting and participating shares of the capital stock of Parentco. We understand that the child acquired control of Parentco from Parent and that Childco acquired control of Parentco from the child. Consequently, we are of the view that Parentco's control of Childco would be deemed, pursuant to paragraph 88(1)(d.2), for the purposes of paragraphs 88(1)(c) and (d), to have been last acquired at the same time as that stated in response to Question a) in respect of the base hypothetical situation.

Consequently, the comments in Questions (a), (b) and (c) would also apply, even taking into account the modified assumptions for the purposes of Question (e).

With respect to the answer to Question (d), there may be some changes in some of our comments if not all marketable securities were transferred by Parent on the issuance of the voting and participating shares of the capital stock of Parentco. However, we are of the view that we would still find that it would not be possible to add an amount to the amount calculated pursuant to subparagraph 88(1)(c)(ii) on the basis of any of the comments provided herein.

These comments are not advance income tax rulings and are not binding on the CRA with respect to a particular situation.

Best regards,

Stéphane Prud'Homme, Notary, M. Fisc.
for the Director
Corporate Reorganizations and Resource Industry Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

Text of Severed Letter

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.

Position: 1. At the time the parent would acquire control of the subsidiary, that is at the time of its incorporation if the parent is the incorporator.

2. The marketable securities would not be eligible for the bump under paragraph 88(1)(c).

3. No. The marketable securities would be "ineligible property" under subparagraph 88(1)(c)(v).

Reasons: 1. Wording of paragraph 88(1)(d.2).

2. The marketable securities would not be held at the time the parent would acquire control of the subsidiary.

3. Wording of subparagraph 88(1)(c)(v).

XXXXXXXXXX
				2011-042298
				Sylvie Labarre, CA

Le 31 octobre 2011

Monsieur,

Objet : Majoration du coût d'un bien lors d'une liquidation

La présente est en réponse à votre courrier électronique du 29 septembre 2011 dans lequel vous nous demandez notre opinion relativement à l'application des alinéas 88(1)c) et d) de la Loi de l'impôt sur le revenu (ci-après la " Loi ") dans les situations hypothétiques mentionnées ci-après.

À moins d'indication contraire, toute référence à un article de loi ou à une de ses composantes dans le présent document constitue une référence à un article de la Loi ou à une de ses composantes.

Situation hypothétique de base

1. En XXXXXXXXXX 2000, un particulier (ci-après " Parent ") aurait constitué une société de gestion (ci-après " Parentco ") en injectant XXXXXXXXXX $ via une souscription d'actions votantes et participantes du capital-actions de Parentco.

2. Quelques mois après la souscription d'actions, Parentco aurait acquis des placements boursiers (" marketable securities ") d'une valeur de XXXXXXXXXX $.

3. En 2010, Parent aurait vendu toutes les actions du capital-actions de Parentco à son enfant en contrepartie d'une somme de XXXXXXXXXX $ payée comptant. Parent se serait imposé sur le gain réalisé lors de vente des actions car il n'avait pas droit à une déduction décrite à l'article 110.6.

4. Au moment de la vente décrite au point 3, la juste valeur marchande (ci-après " JVM ") des placements boursiers aurait été de XXXXXXXXXX $. À ce moment, ces placements boursiers seraient les seuls éléments d'actif de Parentco qui n'aurait aucune dette.

5. Peu de temps après avoir acquis les actions du capital-actions de Parentco, l'enfant constituerait sa propre société de gestion (ci-après " Enfantco ") et y transférerait toutes les actions du capital-actions de Parentco qu'il viendrait d'acquérir et ce, en contrepartie d'un billet de 500 000 $ payable à demande.

6. Parentco serait alors liquidée dans Enfantco et les règles prévues au paragraphe 88(1) s'appliqueraient.

7. Au moment de la liquidation, les placements boursiers d'une valeur de XXXXXXXXXX $ seraient les seuls éléments d'actif de Parentco. Parentco n'aurait aucune dette et n'aurait versé aucun dividende en faveur d'Enfantco.

Questions

a) Enfantco pourrait-elle majorer de XXXXXXXXXX $ le coût des placements boursiers afin d'obtenir un prix de base rajusté (ci-après " PBR ") de XXXXXXXXXX $ en se prévalant des règles prévues à l'alinéa 88(1)d)?

b) Pour les fins des alinéas 88(1)c) et d), à quelle moment Enfantco serait-elle réputée avoir acquis le contrôle de Parentco pour la dernière fois?

c) Si les placements boursiers avaient été acquis par Parentco le jour même de la souscription aux actions du capital-actions de Parentco par Parent (par exemple, quelques heures après la souscription), est-ce que la réponse à la question a) serait différente?

d) Si Parent avait acquis les actions du capital-actions de Parentco en contrepartie du transfert des placements boursiers, est-ce que la réponse à la question a) serait différente?

e) Au lieu d'émettre des actions votantes et participantes uniquement à Parent en XXXXXXXXXX 2000, Parentco émettrait XXXXXXX % des actions votantes et participantes de son capital-actions en faveur de Parent pour une contrepartie de XXXXXXXXXX $ et XXXXXXXXXX % des actions votantes et participantes de son capital-actions en faveur d'un tiers non lié pour une contrepartie de XXXXXXXXXX $. En 2010, la juste valeur marchande des actions du capital-actions de Parentco serait de XXXXXXXXXX $ et l'enfant acquerrait la totalité de ces actions en payant une somme de XXXXXXXXXX $ à Parent et de XXXXXXXXXX $ au tiers non lié. Est-ce que les réponses aux questions précédentes seraient différentes selon ces nouvelles hypothèses?

Nos commentaires

Tel qu'il est mentionné au paragraphe 22 de la Circulaire d'information 70-6R5 du 17 mai 2002, l'Agence du revenu du Canada (" ARC ") a comme pratique de ne pas émettre d'opinion écrite concernant des opérations projetées autrement que par voie de décisions anticipées. Par ailleurs, lorsqu'il s'agit de déterminer si une opération complétée a reçu le traitement fiscal adéquat, la décision en revient d'abord à nos bureaux des services fiscaux à la suite de l'examen de tous les faits et documents, ce qui est généralement effectué dans le cadre d'une mission de vérification. Nous pouvons toutefois vous offrir les commentaires généraux suivants qui, nous l'espérons, vous seront utiles. Ces commentaires pourraient cependant, dans certaines circonstances, ne pas s'appliquer à votre situation particulière.

Dans certains cas, le coût d'un bien d'une filiale attribué à la société mère lors de la liquidation est réputé être le produit de disposition réputé en application de l'alinéa 88(1)a) plus le montant déterminé selon l'alinéa 88(1)d) relativement à ce bien et ce, conformément à l'alinéa 88(1)c).

Cependant, ce ne sont pas tous les biens qui peuvent bénéficier d'une telle majoration. Il faut que le bien attribué à la société mère soit une immobilisation autre qu'un bien non admissible et qu'il ait été un bien de la filiale au moment où la société mère a acquis pour la dernière fois le contrôle de la filiale et qu'il ait appartenu à la filiale par la suite sans interruption jusqu'au moment où il a été attribué à la société mère lors de la liquidation.

Réponse aux questions a) et b)

Dans votre situation hypothétique de base, il faudrait d'abord déterminer si les placements boursiers étaient des immobilisations. Par la suite, nous devrions établir la période de détention de chaque immobilisation (chaque placement) pour déterminer si cette immobilisation appartenait à la filiale au moment où la société mère a acquis pour la dernière fois le contrôle de la filiale et par la suite sans interruption jusqu'à ce qu'elle soit attribué à la société mère.

L'examen des conditions prévues à l'alinéa 88(1)c), dont le critère de la période de détention, doit être fait à l'égard de chaque placement et non pas de façon globale pour l'ensemble de ce qui est regroupé sous le titre " placements boursiers " au bilan.

Aux fins des alinéas 88(1)c), d) et d.2), l'alinéa 88(1)d.2) vient réputer ce qu'est le " moment où la société mère a acquis le contrôle pour la dernière fois " lorsque le contrôle de la filiale a été acquis auprès d'une personne ou d'un groupe de personnes avec lequel l'acquéreur avait un lien de dépendance (autrement qu'à cause d'un droit visé à l'alinéa 251(5)b)). Dans votre situation hypothétique de base, Enfantco aurait acquis le contrôle de Parentco auprès de l'enfant qui aurait un lien de dépendance avec Enfantco. De plus, l'enfant aurait acquis le contrôle de Parentco auprès de Parent qui aurait un lien de dépendance avec lui. Par conséquent, pour les fins des alinéas 88(1)c) et d), le moment où Enfantco aurait acquis pour la dernière fois le contrôle de Parentco serait réputé être le moment où Parent aurait acquis le contrôle de Parentco.

Le moment où Parent aurait acquis le contrôle de Parentco pourrait être avant l'émission des actions votantes et participantes du capital-actions de Parentco en XXXXXXXXXX 2000, soit au moment de la constitution de Parentco si Parent en était le fondateur. En effet, le fondateur d'une nouvelle société acquerrait généralement le contrôle de cette société au moment de sa constitution si aucune action n'était émise à ce moment. C'est ce qui ressort de notre position exprimée, entre autres, dans les interprétations techniques suivantes : nos. 9626315, 9700405, 9801425 et 2002-0118145.

Dans votre situation hypothétique de base, les placements boursiers qui auraient été acquis quelques mois plus tard, ne seraient pas admissibles pour la majoration prévue à l'alinéa 88(1)d) étant donné qu'ils n'auraient pas appartenu à Parentco au moment de l'acquisition du contrôle de Parentco par Parent (soit lors de la constitution de Parentco si Parent est le fondateur de Parentco ou sinon, lors de la première émission d'actions en XXXXXXXXXX 2000).

Réponse à la question c)

La réponse à la question c) ne serait pas différente de celle donnée pour la question a) si les placements boursiers avaient été acquis quelques heures plus tard après le moment où le contrôle de Parentco aurait été acquis par Parent puisqu'à ce moment, les placements boursiers n'auraient pas appartenu à la filiale.

Réponse à la question d)

Si le moment où le contrôle de Parentco aurait été acquis par Parent était le moment de la constitution de Parentco parce que Parent en serait le fondateur, la réponse à la question d) ne serait pas différente de celle donnée pour la question a) puisque les placements boursiers ne pourraient appartenir à la filiale au moment de sa constitution.

Par contre, si le moment où Parent aurait acquis le contrôle de Parentco n'était pas le moment de la constitution mais bien le moment de la première émission d'actions (par exemple, si Parentco était une société " tablette " et avait donc été constituée par un tiers non lié à Parent n'agissant pas à titre de mandataire de Parent), les placements boursiers qui auraient été transférés en contrepartie de la première émission d'actions du capital-actions de Parentco, appartiendraient à Parentco au moment où Enfantco serait réputé avoir acquis pour la dernière fois le contrôle de Parentco en vertu de l'alinéa 88(1)d.2). En plus de déterminer (comme il est mentionné précédemment) si chaque placement boursier est une immobilisation, il faudrait alors déterminer si ce placement boursier avait appartenu à la filiale sans interruption depuis ce moment jusqu'à l'attribution de ce placement par Parentco en faveur d'Enfantco lors de la liquidation. Il faudrait aussi examiner si chaque placement boursier est un bien non admissible en vertu des sous-alinéas 88(1)c)(iv) à (vi).

Dans une situation où Parent ne serait pas considéré comme ayant acquis le contrôle de Parentco lors de la constitution de cette dernière et où les placements boursiers appartiendraient à Parentco au moment où Parent aurait acquis le contrôle de Parentco, le sous-alinéa 88(1)c)(v) s'appliquerait si nous tenons compte des hypothèses que vous décrivez dans votre demande, telles que modifiées par celle mentionnée à la question d). En effet, dans une telle situation, les placements boursiers auraient été acquis par Parentco d'une personne (Parent) qui aurait un lien de dépendance avec Enfantco (conformément au paragraphe 88(1.7)) autrement qu'à cause d'un droit visé à l'alinéa 251(5)b) dans le cas où l'acquisition faisait partie d'une série d'opérations ou d'événements dans le cadre de laquelle Enfantco aurait acquis pour la dernière fois le contrôle de Parentco. Nous sommes d'avis que, dans une telle situation, la présomption prévue au paragraphe 88(1)d.2) (qui ramène l'acquisition de contrôle de Parentco par Enfantco au moment où Parent aurait acquis le contrôle de Parentco) ferait en sorte qu'il faudrait se demander si l'acquisition des placements boursiers fait partie de la même série d'opérations ou d'événements que l'émission des actions du capital-actions de Parentco en faveur de Parent. Étant donné que l'acquisition des placements boursiers serait effectuée en contrepartie de cette émission d'actions, il serait difficile de prétendre que cette acquisition ne ferait pas partie de la même série d'opérations ou d'événements que l'acquisition de contrôle de Parentco par Parent. Par conséquent, les placements boursiers transférés à Parentco en contrepartie de l'émission des actions de Parentco nous sembleraient constituer des biens non admissibles en vertu du sous-alinéa 88(1)c)(v).

Relativement à ce qui précède, nous sommes d'avis que le paragraphe 88(1.7) s'appliquerait pour réputer que Parent avait un lien de dépendance avec Enfantco même si elles ne coexistaient pas étant donné que Parent avait un lien de dépendance avec Enfantco avant la liquidation.

Par ailleurs, même si les sous-alinéas 88(1)c)(iv) à (vi) ne s'appliquaient pas à une situation donnée et même si toutes les conditions permettant d'obtenir la majoration du coût, prévue à l'alinéa 88(1)d), étaient satisfaites, la majoration du coût des placements aurait été limitée au montant décrit au sous-alinéa 88(1)d)(ii). Ainsi, le montant de majoration aurait été limité à l'excédent éventuel de la JVM de l'immobilisation au moment où Enfantco a acquis pour la dernière fois le contrôle de Parentco sur le coût indiqué de cette immobilisation pour Parentco immédiatement avant la liquidation.

Par conséquent, selon les hypothèses de base modifiées par la question d), il ne serait pas possible d'ajouter un montant à celui calculé conformément au sous-alinéa 88(1)c)(ii) au titre du coût, pour la société mère (Enfantco), de chaque bien de la filiale (Parentco) attribué à la société mère lors de la liquidation.

Réponse à la question e)

Selon les hypothèses mentionnées à la question e), nous comprenons que la personne qui acquerrait le contrôle de Parentco serait toujours Parent, soit lors de la constitution de Parentco, soit lors de l'émission des actions votantes et participantes du capital-actions de Parentco, selon les faits. Nous comprenons que l'enfant acquerrait le contrôle de Parentco auprès de Parent et qu'Enfantco acquerrait le contrôle de Parentco auprès de l'enfant. Par conséquent, nous sommes d'avis que le contrôle de Parentco par Enfantco serait réputé, aux fins des alinéas 88(1)c) et d), avoir été acquis la dernière fois au même moment que celui mentionné en réponse à la question a) à l'égard de la situation hypothétique de base et ce, conformément à l'alinéa 88(1)d.2).

Par conséquent, les commentaires aux questions a), b) et c) s'appliqueraient également même en tenant compte des hypothèses modifiées aux fins de la question e).

Quant à la réponse à la question d), il se pourrait qu'il y ait des modifications dans certains de nos commentaires si les placements boursiers n'avaient pas tous été transférés par Parent lors de l'émission des actions votantes et participantes du capital-actions de Parentco. Cependant, nous sommes d'avis que nous arriverions quand même à la conclusion qu'il ne serait pas possible d'ajouter un montant à celui calculé conformément au sous-alinéa 88(1)c)(ii) en se fondant sur l'un ou l'autre des commentaires indiqués à la présente.

Ces commentaires ne constituent pas des décisions anticipées en matière d'impôt sur le revenu et ne lient pas l'ARC à l'égard d'une situation particulière.

Nous vous prions d'agréer, Monsieur, l'expression de nos sentiments distingués.

Stéphane Prud'Homme, notaire, M.Fisc.
pour le directeur
Division des réorganisations des sociétés
et de l'industrie des ressources
Direction des décisions en impôt
Direction générale de la politique législative
et des affaires réglementaires

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(c) - Subparagraph 88(1)(c)(v)

properties not bumpable as the subsidiary control was deemed by s. 88(1)(d.2) to be acquired at the same time as it acquired the properties

In 2000, an individual ("Parent") subscribed cash for common shares on the incorporation of "Parentco", with Parentco purchasing marketable securities a few months (or a few hours) later. In 2010, Parent sold his shares of Parentco to his child for FMV cash consideration (thereby realizing gain at which time the marketable securities were the only assets of Parentco.) The child shortly thereafter transferred the shares of Parentco to a newly incorporated corporation ("Childco") in consideration for a demand promissory note, and wound-up Parentco.

CRA found that the bump was not available because the marketable securities were deemed under s. 88(1)(d.2) not to be owned by Parentco at the time of its acquisition of control by Childco (as required in the midamble of s. 88(1)(c)): s. 88(1)(d.2) deemed Childco to have acquired control of Parentco when Parent acquired control of Parentco, and the marketable securities (which were subsequently acquired) "did not belong to Parentco at the moment of the acquisition of control of Parentco by Parent (being when Parentco was incorporated if Parent was the incorporator or otherwise when the first issuance of shares occurred in …2000)"... See the summary under s. 88(1)(d.2).

What if Parent owned the marketable securities, and acquired the shares of Parentco as consideration for the transfer to Parentco of the securities? After noting that the above response would not be different if control of Parentco was acquired on its incorporation, CRA stated (TaxInterpretations translation):

[I]f the time when Parent acquired control of Parentco was not the time of incorporation but the time of the first issuance of shares (for example, if Parentco was a "shelf" company and had, therefore, been incorporated by a third party unrelated to Parent not acting as Parent's agent), the marketable securities that would have been transferred in consideration for the initial issuance of Parentco's share capital would be owned by Parentco at the time that it was last deemed to have acquired control of Parentco under paragraph 88 (1) (d.2). ... [I]t would then be necessary to determine whether that investment had been owned by the subsidiary continuously from that time until Parentco's distribution of that investment to Childco on the winding-up. …

In the situation where Parent was not be considered to have acquired control of Parentco on the incorporation of Parentco and the marketable securities belonged to Parentco at the time when Parent acquired the control of Parentco, subparagraph 88(1)(c)(v) would apply if the assumptions you described in your request are taken into account, as modified by those stated in question (d). In such a situation, the marketable securities would have been acquired by Parentco from a person (Parent) who did not deal at arm's length with Childco (pursuant to subsection 88 (1.7)) other than by reason of a right referred to in paragraph 251(5)(b) where the acquisition was made as part of a series of transactions or events in which Childco had last acquired control of Parentco … . Given that the acquisition of the marketable securities was made in consideration for this issuance of shares, it is difficult to consider that this acquisition was not part of the same series of transactions or events as the acquisition of control of Parentco by Parent. Consequently, the marketable securities transferred to Parentco in consideration for the issuance of the shares of Parentco appear to us to constitute ineligible property by virtue of subparagraph 88(1)(c)(v).

…[S]ubsection 88(1.7) applies to deem Parent to not deal at arm's length with Childco even if they did not co-exist given that Parent did not deal at arm's length with Childco before the winding-up.

Summary Under

Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(c) - Subparagraph 88(1)(c)(vi)

bump unavailable given previous non-arm's length acquisition

In 2000, an individual ("Parent") subscribes cash on the incorporation of "Parentco" with Parentco purchasing marketable securities a few hours later. In 2010, Parent sells his shares of Parentco to his child, who then transfers the shares of Parentco to a newly incorporated corporation ("Childco"), and winds-up Parentco.

The bump will not be available to Childco on the winding-up of Parentco because Parent (and, thus, Childco under s. 88(1)(d.2)) will be considered to have acquired control of Parentco at the time of its incorporation (and before the issuance of any shares of Parentco to Parent), at which time Parentco will not hold the marketable securities. Furthermore, the marketable securities would be ineligible property under s. 88(1)(c)(v) where they were acquired by Parentco from a person not dealing at arm's length with Enfantco (i.e., Parent) as part of a series of transactions in which Childco last acquired control of Parentco.

Summary Under

Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d.2)

properties not bumpable as not owned at subsidiary's formation by related person

In finding that the bump was not available because the marketable securities were deemed under s. 88(1)(d.2) not to be owned by Parentco at the time of its acquisition of control by Childco (as required in the midamble of s. 88(1)(c)), CRA stated (TaxInterpretations translation):

Childco acquired the control of Parentco from the child, who was not dealing at arm's length with it. Furthermore, the child acquired the control of Parentco from Parent with whom the child was not dealing at arm's length. Consequently ... the time that Childco last acquired the control of Parentco was deemed [by s. 88(1)(d.2)] to be the time when Parent acquired the control of Parentco.

The time when Parent acquired control of Parentco could be ...the time of the incorporation of Parentco, if Parent was the incorporator. The incorporator of a new corporation generally acquires its control at the moment of its incorporation if no share is issued at that time. ...

[T]he marketable securities which were acquired several months later would not be eligible for the bump of 88(1)(d) given that they did not belong to Parentco at the time of the acquisition of control of Parentco by Parent (being when Parentco was incorporated if Parent was the incorporator or otherwise when the first issuance of shares occurred in ... 2000).

The response…would not be different…if the marketable securities were [instead] acquired several hours after the time when the control of Parentco was acquired by Parent as the marketable securities could not belong to the subsidiary at the time of its incorporation.

The analysis did not change if shares were issued by Parentco not only to Parent but also to a minority third party.

You are here

31 October 2011 External T.I. 2011-0422981E5 F - Whether property is eligible for a bump

View modes

Translation disclaimer