5 October 2012 APFF Roundtable Q. 8, 2012-0454161C6 F - Computation of CDA and Acquisition of Control

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111(4)(a)

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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.

Principal Issues: Whether the CDA of a corporation should be adjusted to take into account the fact that its net capital losses for a taxation year ending before its acquisition of control are not deductible in computing its taxable income for a taxation year ending after the acquisition of control?

Position: No.

Reasons: The law.

FEDERAL TAX ROUNDTABLE 5 OCTOBER 2012
2012 APFF CONFERENCE

Question 8

Impact of an acquisition of control on the capital dividend account

Mr. A and Mr. B, two unrelated individuals, each hold 50% of the common shares of a holding corporation (Holdco). The FMV of Holdco's shares is valued at $1 million, being the total value of its only asset, being cash.

Holdco is a Canadian-controlled private corporation whose capital dividend account ("CDA") balance is currently nil. Holdco has net capital losses carryforwards of $200,000. These net capital losses result in the paragraph (a) amount in the calculation of Holdco’s CDA balance being currently nil.

In January 2012, Mr. A purchased Mr. B's shares of Holdco resulting in an acquisition of control of Holdco by Mr. A. By virtue of paragraph 111(4)(a), Holdco cannot deduct its net capital losses of $200,000 in computing its taxable income for the taxation year ending after the acquisition of its control.

Should the calculation of Holdco’s CDA be adjusted considering that its net capital losses became non-deductible from that point on, and if so, on what basis?

CRA Response

First, we are of the view that the acquisition of shares of the capital stock of a corporation whose only asset is cash as in the particular situation could be part of a surplus stripping scheme in respect of which subsection 245(2) could be invoked.

With respect to your question, we are of the view that the fact that Holdco's net capital losses are not deductible in computing its taxable income for a taxation year ending after the acquisition of control, by virtue of paragraph 111(4)(a), has no impact on the calculation of the CDA of Holdco. In fact, the calculation of a corporation's CDA is a cumulative calculation and no particular adjustment is provided for in a situation similar to the one you submitted to us.

In addition, in the particular situation, we find that, given the nature of its assets, Holdco cannot avail itself of the mechanism provided for in paragraph 111(4)(e) that could have allowed it to realize taxable capital gains to offset net capital losses that would otherwise disappear as a result of the acquisition of control, which would have allowed it, as well, to adjust its CDA accordingly.

Marc LeBlond
(613) 957-2108
2012-045416

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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 ADOPTÉE: No.

Raisons: The law.

TABLE RONDE SUR LA FISCALITÉ FÉDÉRALE DU 5 OCTOBRE 2012
APFF - CONGRÈS 2012

Question 8

Impacts d’une acquisition de contrôle sur le compte de dividende en capital

M. A et M. B, deux particuliers non liés, détiennent chacun 50 % des actions ordinaires de la société de gestion Gesco. La JVM des actions de Gesco est évaluée à 1 M$, à savoir le total de son seul actif, de l’encaisse.

Gesco est une société privée sous contrôle canadien dont le solde du compte de dividendes en capital (« CDC ») est présentement nul. Gesco a des pertes en capital nettes à reporter de 200 000 $. Ces pertes en capital nettes font en sorte que le montant de l’alinéa a) dans le calcul du solde du CDC de Gesco est actuellement nul.

En janvier 2012, M. A achète les actions de Gesco de M. B entraînant ainsi une acquisition de contrôle de Gesco par M. A. En vertu de l’alinéa 111(4)a) L.I.R., Gesco ne peut déduire ses pertes en capital nettes de 200 000 $ dans le calcul de son revenu imposable pour une année d’imposition se terminant après l’acquisition de son contrôle.

Est-ce que le calcul du CDC de Gesco doit être ajusté considérant que ses pertes en capital nettes deviennent non déductibles à partir de ce moment, et si oui, en vertu de quoi?

Réponse de l’ARC

Tout d'abord, nous sommes d’avis que l’acquisition d’actions du capital-actions d’une société dont le seul actif est de l’encaisse comme dans la situation donnée pourrait faire partie d’un stratagème de dépouillement de surplus à l’égard duquel le paragraphe 245(2) L.I.R. pourrait être invoqué.

Pour ce qui est de votre question, nous sommes d’avis que le fait que les pertes en capital nettes de Gesco ne soient pas déductibles dans le calcul de son revenu imposable pour une année d’imposition se terminant après l’acquisition de contrôle, en vertu de l’alinéa 111(4)a) L.I.R., n’a aucun impact sur le calcul du CDC de Gesco. En effet, le calcul du CDC d’une société est un calcul cumulatif et aucun ajustement particulier n’est prévu dans une situation semblable à celle que vous nous avez soumise.

De plus, dans la situation soumise, nous constatons qu’étant donné la nature de son actif, Gesco ne peut se prévaloir du mécanisme prévu à l’alinéa 111(4)e) L.I.R. qui aurait pu lui permettre la réalisation de gains en capital imposables pour éponger les pertes en capital nettes qui autrement disparaissent à la suite de l’acquisition de contrôle; ce qui lui aurait permis également, d’ajuster son CDC en conséquence.

Marc LeBlond
(613) 957-2108
2012-045416

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 245 - Subsection 245(4)

purchase of shares of cash-rich company could be part of abusive surplus strip

Where Mr. A, who owns 50% of the shares of a CCPC ("Holdco") having cash as its only asset, purchases the other 50% shareholding of Mr. B, s. 245(2) potentially may apply (Tax Interpretations Translation):

[T]he acquisition of shares of the capital stock of a corporation whose only asset is cash as in the particular situation could be part of a surplus stripping scheme in respect of which subsection 245(2) could be invoked.

Summary Under

Tax Topics - Income Tax Act - Section 89 - Subsection 89(1) - Capital Dividend Account - Paragraph (a)

CDA deduction for net capital losses not affected by their denial under s. 111(4)(a)

Where Mr. A, who owns 50% of the shares of a CCPC ("Holdco") having net capital losses of $200,000, purchases the other 50% shareholding of Mr. B, thereby giving rise to an acquisition of control of Holdco, such net capital losses will still be taken into account in computing the CDA of Holdco following the acquisition of control (Tax Interpretations Translation):

[T]he fact that Holdco's net capital losses are not deductible in computing its taxable income for a taxation year ending after the acquisition of control, by virtue of paragraph 111(4)(a), has no impact on the calculation of the CDA of Holdco. In fact, the calculation of a corporation's CDA is a cumulative calculation and no particular adjustment is provided for in a situation similar to the one you submitted.

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5 October 2012 APFF Roundtable Q. 8, 2012-0454161C6 F - Computation of CDA and Acquisition of Control

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