21 February 2013 External T.I. 2012-0435881E5 - Wind-up and Reg. 5908

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.

Principal Issues: Whether proposed subsection 5908(4) will apply where a taxable Canadian corporation winds up its taxable Canadian wholly-owned subsidiary, which causes the partnership formed by these two corporations to cease to exist, which results in the shares of a foreign affiliate previously held by the partnership to be distributed to the surviving partner.

Position: Yes.

Reasons: The deeming rules in subsections 5908(1) and (2) will apply such that subsection 5908(4) will apply.

XXXXXXXXXX
2012-043588
A. Seidel
(613) 957-2058

February 21, 2013

Dear XXXXXXXXXX:

Re: Draft Regulations

This is in reply to your February 2, 2012 letter wherein you requested our views with respect to the interaction of proposed subsections 5905(5) and 5908(1) to (4) of the Income Tax Regulations (the "Regulations"), as described in Bill C-48, which received first reading in the House of Commons on November 21, 2012, to the situation described below.

Background

1. A taxable Canadian corporation ("Parent") owns all of the issued and outstanding shares of a taxable Canadian corporation ("Subsidiary"). Parent and Subsidiary formed a Canadian partnership (the "Partnership") in which Parent has a 1% partnership interest and Subsidiary has a 99% partnership interest. The Partnership owns all 100 of the issued common shares of a foreign corporation ("FA").

2. Parent will wind up Subsidiary in accordance with the rules in subsection 88(1) of the Act. Pursuant to corporate law, the Partnership will cease to exist immediately after the wind up of Subsidiary.

Issue

Will proposed subsection 5905(5) of the Regulations apply by reason of proposed subsections 5908(1) to (4) of the Regulations? You are concerned that, in the situation described above, paragraph 88(1)(a.2) of the Act will deem the Partnership interest not to have been disposed of by Subsidiary such that proposed paragraph 5908(3)(b) of the Regulations will not apply. As a result, none of subsections 5908(1) to (4) can apply in the situation described above.

Our Comments

In our view, proposed subsection 5908(4) of the Regulations applies in the above scenario to deem Subsidiary to have disposed of 99 common shares of FA to Parent. Our rationale is as follows. Immediately before the wind up of Subsidiary, proposed subsection 5908(1) of the Regulations deemed Subsidiary to own 99 common shares of FA. Immediately after the wind-up of Subsidiary and the dissolution of the Partnership, proposed subsection 5908(1) of the Regulations did not deem Subsidiary to own any common shares of FA. In our view, these facts are sufficient to give rise to the application of proposed paragraph 5908(2)(a) of the Regulations such that it will apply to deem Subsidiary to have disposed of the 99 common shares of FA previously deemed to be owned by it. Moreover, since after the wind-up, Parent owns those 99 common shares as a consequence of the transaction or event that gave rise to the disposition by Subsidiary, proposed subsection 5908(4) will deem Subsidiary to have disposed of the 99 common shares to Parent.

We trust our comments are of assistance.

Yours truly,

for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch