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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 subsection 87(2.11) would take precedence over subsection 87(2.1) in the situation described?
Position: No.
Reasons: Wording of the provisions.
XXXXXXXXXX 2006-017034
R. Gagnon
October 26, 2006
Dear Sir,
Subject: Sections 87(2.1) and 87(2.11) of the Income Tax Act
This is in response to your letter of January 23, 2006, in which you asked us about the application of subsections 87(2.1) and 87(2.11) of the Income Tax Act (the "Act") to the situation described below.
Unless otherwise indicated, all statutory references herein are to provisions of the Act.
Facts and Assumptions
1. Canco, Subco1, Subco2 and Amalco1 are "taxable Canadian corporations" as defined in subsection 89(1).
2. The regular taxation year-end (as defined in subsection 249(1)) of the above corporations has always been December 31.
3. Prior to November 1, 2003, Canco always owned all the issued and outstanding shares of the capital stock of Subco1 and Subco2.
4. Canco and Subco1 amalgamated on November 1, 2003. The combination of Canco and Subco1 constituted an "amalgamation" within the meaning of section 87(1). Amalco1 is the corporation resulting from the amalgamation of Canco and Subco1. Since the amalgamation, Amalco1 has owned all of the issued and outstanding shares of the capital stock of Subco2.
5. Canco and Subco1 each had a taxation year ending on October 31, 2003, pursuant to paragraph 87(2)(a), as a result of the amalgamation of the two corporations. The first taxation year of Amalco1 ended on December 31, 2003.
6. Canco and Subco1 each had a "non-capital loss", as defined in subsection 111(8) (a "Loss"), in their taxation year ended October 31, 2003. Amalco1 incurred a Loss in its taxation year ended December 31, 2003. Subco2 sustained a Loss in its taxation year ended December 31, 2003.
7. It is intended that Amalco1 and Subco2 will be amalgamated on January 1, 2007. The combination of Amalco1 and Subco2 will constitute an "amalgamation" within the meaning of section 87(1). Amalco2 will be the corporation resulting from the amalgamation of Amalco1 and Subco2. Amalco2 will be a taxable Canadian corporation.
8. The Losses of Canco, Subco1, Subco2 and Amalco1 have not been deducted pursuant to subsection 111(1), nor claimed under subsection 186(1), by any corporation.
Your Questions
1. Does subsection 87(2.11) take precedence over the application of subsection 87(2.1) in the situation described above?
2. Would the proposed merger of Amalco1 and Subco2 result in Subco2's non-capital loss for its 2003 taxation year being aged by two taxation years (rather than one year) in the 2003 calendar year?
It appears to us that the situation described in your letter may be an actual situation involving taxpayers. The Canada Revenue Agency ("CRA") does not generally provide written opinions on proposed transactions otherwise than by way of advance ruling. Furthermore, it is the responsibility of the relevant Tax Services Office to determine whether completed transactions have received appropriate tax treatment. We can, however, offer the following general comments which may not apply in full to the present situation.
Question 1
It appears to us that the question of whether or not subsection 87(2.11) overrides the application of subsection 87(2.1) is irrelevant for the purposes of determining how the Losses of the corporations in the situation described above might be used. The purpose of subsection 87(2.1) is to allow the transfer of the Predecessor Corporations' Losses to the new corporation (the corporation resulting from the amalgamation of the Predecessor Corporations), i.e. the loss carry-forward. One of the purposes of subsection 87(2.11) is to allow a parent corporation that is amalgamated with a wholly owned subsidiary to use losses realized by the new corporation, i.e. the carrying back of losses.
In our view, subsection 87(2.11) would not be relevant to Amalco2's use of Subco2's Loss incurred in its taxation year ended December 31, 2003.
Question 2
In the situation described above, the effect of subsection 87(2.1) would be that the Subco2 Loss incurred in its taxation year that ended on December 31, 2003, would become a Amalco2 Loss for the same taxation year. The Subco2 Loss would not be aged by two taxation years in the 2003 calendar year.
Please note that this opinion is not an advance ruling and, as stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, is not binding on the CRA with respect to any particular factual situation.
We apologize for the delay in responding to your request.
Best regards,
Maurice Bisson, CGA
for the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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