18 February 2013 External T.I. 2012-0467121E5 - Associated corporations, Debt Forgiveness

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: 1. Whether a foreign corporation and a Canadian corporation that are jointly owned by a husband and wife are associated. 2. Whether the foreign corporation is a foreign affiliate of the Canadian corporation. 3. Application of debt forgiveness rules.

Position: 1. Yes. 2. General comment provided. 3. Possibly.

Reasons: 1. Pursuant to paragraph 256(1)(b)-(c). 2. Question of fact. 3. Question of fact.

XXXXXXXXXX
2012-046712
Eli Kae Moore

February 18, 2013

Dear XXXXXXXXXX,

Re: Associated corporations

We are writing in response to your facsimile message of October 24, 2012, and further to our telephone conversation of October 31, 2012 (Moore/XXXXXXXXXX).

In your correspondence, you outlined the following scenario:

• Husband and Wife are married, and are "related persons" under subsection 251(2) of the Income Tax Act;
• ForeignCo is a corporation created under the laws of a country other than Canada;
• CanadaCo is a corporation created under the laws of Canada;
• Husband owns 51% and Wife owns 49% of ForeignCo;
• Wife owns 51% and Husband owns 49% of CanadaCo;
• ForeignCo and CanadaCo are in the process of wind up and dissolution; and
• As part of the winding-up of the corporations, ForeignCo may write-off an amount owed to it by CanadaCo (the "ForeignCo debt").

In respect of the above situation, you asked whether ForeignCo and CanadaCo would be considered "associated corporations", and whether ForeignCo would be considered a "foreign affiliate" of CanadaCo. You also asked whether any tax consequences could arise to CanadaCo as a result of ForeignCo's forgiveness of the ForeignCo debt.

As mentioned in our telephone conversation, the situation you described relates to actual completed transactions. As outlined in Information Circular IC 70-6R5, Advance Income Tax Rulings, it is not the practice of the Income Tax Rulings Directorate to issue opinions on completed transactions.

However, we can offer the following general comments.

The determination of whether any two corporations are "associated" for purposes of the Income Tax Act is a question of fact. The Canada Revenue Agency has provided guidance in respect of this determination in its Interpretation Bulletin IT-64R4, Corporations: Association and Control, which is available through our website (www.cra-arc.gc.ca). In respect of the situation that you have described, paragraph 2 of this Bulletin may be of particular interest to you, noting that two corporations are associated with each other if they are both controlled, directly or indirectly in any manner whatever, by the same group of persons, such as the group that includes Husband and Wife. Further, it is possible for corporations to be associated with each other if they are controlled, directly or indirectly in any manner whatever, by related persons or related groups of persons and certain cross-ownership tests are met, as discussed in paragraph 27 of IT-64R.

Similarly, the determination of whether a foreign corporation is a "foreign affiliate" of a Canadian corporation is also a question of fact. Generally speaking, in the situation that you have described, and based on the definition of "foreign affiliate" in subsection 95(1) of the Income Tax Act, CanadaCo would be required to hold an equity interest in ForeignCo of at least 1% in order for ForeignCo to be considered a foreign affiliate of CanadaCo.

In addition, as you have noted, section 80 of the Income Tax Act contains a set of rules that are generally applicable to situations involving debt forgiveness. Although a complete discussion of the application of these rules is beyond the scope of this response, based on the very limited information provided in your submission, we do want you to be aware of their existence.

We trust that our comments will be of assistance to you. For any further guidance in respect of the completion of schedules required in support of corporate tax returns, including schedules T2SCH9, Related and Associated Corporations, and T2SCH25, Investment in Foreign Affiliates, please consult the CRA Enquiries service for businesses and self-employed individuals by phoning 1-800-959-5525.

We hope these comments have been of assistance.

Yours truly,

Robert A. Demeter
Section Manager
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch