1999 Ruling 9833743 - SHARES SUBSTITUTED FOR OTHER SHARES

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether shares of foreign subsidiaries received on a subsection 88(3) wind-up are shares substituted for the shares of the foreign affiliate that has been wound-up for the purposes of the application of subsection 93(2).

Position: They are.

Reasons: The words of subsection 93(2) are clear. The Department recognizes that this will result double counting of certain dividends that have flowed through the wound-up affiliate from foreign affiliates below. In these circumstances, such dividends will be counted only once for the purposes of applying subsection 93(2). In addition if shares of more than one affiliate have been transferred from the foreign affiliate being wound-up to its former shareholder, the dividends that have been paid by the wound-up corporation will be allocated for the purposes of applying subsection 93(2), to the subsidiaries on a pro-rata basis on the basis of adjusted cost base.

XXXXXXXXXX
XXXXXXXXXX 983374
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs:

Re: XXXXXXXXXX Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of the above referenced taxpayer. We also acknowledge your subsequent correspondence dated XXXXXXXXXX and our telephone conversations.

Definitions

In this letter the following terms have the meanings specified:

a) "Act" means the Income Tax Act R.S.C. 1985, c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act. All terms used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated. References herein to the "Regulations" are references to the Income Tax Regulations.

b) "Canco" means XXXXXXXXXX, a Canadian public corporation incorporated in XXXXXXXXXX files its income tax returns at the XXXXXXXXXX Taxation Centre.

c) "S" means XXXXXXXXXX ("S"), a corporation organized and resident in the United States (under both the Act and the Canada - U.S. Income Tax Convention [the "Treaty"]).

d) "NV" means XXXXXXXXXX.

e) "T" means XXXXXXXXXX.

f) "U" means XXXXXXXXXX.

g) "V" means XXXXXXXXXX.

h) "W" means XXXXXXXXXX.

i) "X" means XXXXXXXXXX.

j) "USOLDCO" means XXXXXXXXXX.

k) "CANOLDCO" means XXXXXXXXXX.

I. FACTS

1. To the best of your knowledge and that of the taxpayer involved, none of the issues associated with this request:

a) is involved in an earlier return of the taxpayer or a related person,

b) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by the taxpayer or a related person,

c) is under objection, or

d) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.

2. Canco is a corporation resident in Canada. XXXXXXXXXX.

3. Canco reported net taxable capital gains of CAN$XXXXXXXXXX. Canco did not have any net capital losses from prior years which it could apply against the CAN$XXXXXXXXXX net taxable capital gains. Canco has realized net capital losses in XXXXXXXXXX of CAN$XXXXXXXXXX. It does not expect to realize any further capital losses in the foreseeable future.

4. Canco paid Canadian income taxes of about CAN$XXXXXXXXXX on the CAN$XXXXXXXXXX of net taxable capital gains recognized in XXXXXXXXXX. Canco is to recover the full CAN$XXXXXXXXXX in taxes paid on the gains by carrying back non-capital loss suffered in XXXXXXXXXX (CAN$XXXXXXXXXX) and XXXXXXXXXX (CAN$XXXXXXXXXX) to the XXXXXXXXXX taxation year.

5. Canco owns all of the outstanding common shares of S, a corporation resident in the United States.

6. S became a wholly-owned subsidiary of Canco upon the distribution in XXXXXXXXXX of all of S's then outstanding common and preferred shares to Canco by N.V., Canco's wholly-owned subsidiary organized and resident in XXXXXXXXXX. The distribution by N.V. of all of the outstanding S shares to Canco was governed by subsection 88(3). Canco had previously owned the shares of S directly but had transferred them to NV in XXXXXXXXXX under subsection 85.1(3) in exchange for a promissory note and shares of NV. The XXXXXXXXXX transfer would have resulted in a capital gain of CAN$XXXXXXXXXX to Canco on the disposition of shares in NV except that an election was made under subsection 93(1) to deem a portion of the proceeds of disposition equal to such amount to be a dividend paid to Canco from the exempt surplus of NV. Similarly, XXXXXXXXXX transfer would have resulted in a CAN$XXXXXXXXXX capital gain to Canco, except that an election under was made under subsection 93(1) to characterize a portion of the proceeds of disposition of the shares of S equal to such amount as a dividend from the exempt surplus of S.

7. S is a "United States real property interest" within the meaning of section 897(c) of the Internal Revenue Code of 1986 (the "Code") and Article XIII(3)(a) of the Treaty.

8. Canco has contributed money and other property to S since XXXXXXXXXX in exchange for additional S common shares. Additional contributions to S of CAN$XXXXXXXXXX in aggregate in exchange for S common shares took place from XXXXXXXXXX to XXXXXXXXXX. In each case, the fair market value of S increased by the amount of money or the fair market value of property invested in S by Canco. The funds from the contributions were used by S in its own active business operations and to fund the active business operations of its subsidiaries T and U. XXXXXXXXXX.

9. S has also made dividend distributions to Canco totalling CAN$XXXXXXXXXX in XXXXXXXXXX and XXXXXXXXXX and U.S.$XXXXXXXXXX in XXXXXXXXXX. U.S.$XXXXXXXXXX of such XXXXXXXXXX distributions were from the preacquisition surplus of S. The total amount of the "exempt dividends" as defined in subsection 93(3), including the exempt dividends arising as a result of the subsection 93(1) elections referred to in paragraph 6 above, that have been paid on the shares of S and NV to Canco for the purposes of subsection 93(2) is approximately CAN$XXXXXXXXXX.

10. S corporation also has preferred shares outstanding all of which are owned by Canco. All of the preferred shares were acquired in XXXXXXXXXX as part of the dissolution of N.V. The preferred shares were originally issued in exchange for money and their fair market value immediately after issuance was equal to the amount of money invested in the preferred shares by Canco.

11. The adjusted cost base for Canadian tax purposes of the S common and preferred shares to Canco is estimated to be CAN$XXXXXXXXXX. The S common and preferred shares are estimated to have a fair market value between CAN$XXXXXXXXXX and CAN$XXXXXXXXXX.

12. S corporation was incorporated in the State of XXXXXXXXXX in XXXXXXXXXX. S is the common parent of a group of directly owned U.S. organized and resident wholly-owned corporations which file U.S. income tax returns on a consolidated basis. The members of the U.S. consolidated group of corporations are S, T, U, V and W (the "S Group of Corporations"). T also wholly owns a U.S. organized and resident corporation, X. X is not a member of the U.S. consolidated tax filing.

13. All of the shares of S, T, U, V, W and X constitute capital property to their owners for Canadian tax purposes (and always did).

14. Each of S, T, U, V, W and X file U.S. income tax returns on the basis of a calendar year. Each corporation also uses the calendar year as the period for which its accounts are ordinarily drawn up.

15. The S Group of Corporations was not in a taxable position in its XXXXXXXXXX taxation year. In fact, the S Group of Corporations reported significant consolidated net operating losses to be carried forward after XXXXXXXXXX.

16. In addition to its ownership of all of the outstanding shares of T, U, V, and W corporations, S carries on one or more businesses each of which is an active business and not an "investment business" within the meaning of subsection 95(1) and which may be described as the marketing of products produced from the S Group of Corporations' XXXXXXXXXX in the United States. As well, S performs certain legal, accounting, tax and other headquarters' functions for the S Group of Corporations.

17. XXXXXXXXXX.

18. T was incorporated by S in the State of XXXXXXXXXX. T's business is an active business and is not an "investment business" within the meaning of subsection 95(1).

19. All of T's common shares have been owned by S at all times since T's incorporation. However, S contributed money or other property to T in exchange for additional common shares on two separate dates since incorporation. The fair market value of T increased by the amount of money or the fair market value of other property invested in T by S in exchange for additional T common shares. T has also made dividend distributions to S in XXXXXXXXXX. All of such dividends were made out of the preacquisition surplus of T. Accordingly such dividends would have reduced the adjusted cost base of the shares of T to S pursuant to paragraphs 92(2)(c) and 53(2)(b). S's adjusted cost base in its T shares is estimated to be approximately CAN$XXXXXXXXXX and their fair market value is estimated to be between CAN$XXXXXXXXXX and CAN$XXXXXXXXXX.

20. U's history may be summarized as follows:

a) U was incorporated by USOLDCO in the State of XXXXXXXXXX in XXXXXXXXXX and has been engaged in an active business that is not an "investment business" within the meaning of subsection 95(1) from the time of incorporation to the present.

b) U is a resident of the United States under both the Act and the Treaty.

c) U was initially capitalized by USOLDCO for cash in the amount of U.S.$XXXXXXXXXX in exchange for U common shares.

d) U used the proceeds it received from USOLDCO upon incorporation to acquire a XXXXXXXXXX% interest in a newly organized U.S. partnership (the "Partnership"). The remaining XXXXXXXXXX% partnership interest was initially owned by a person with which Canco and each member of the S Group of Corporations dealt at arm's length.

e) USOLDCO was a XXXXXXXXXX% owned, U.S. organized (State of XXXXXXXXXX) and U.S. resident, subsidiary of CANOLDCO. CANOLDCO was a taxable Canadian corporation controlled by Canco. Canco initially owned XXXXXXXXXX% of the voting shares of CANOLDCO and, commencing in XXXXXXXXXX, CANOLDCO became a wholly-owned subsidiary of Canco. Canco paid approximately CAN$XXXXXXXXXX for the other XXXXXXXXXX% of the shares of CANOLDCO in XXXXXXXXXX. USOLDCO was at all times since incorporation a "controlled foreign affiliate" of CANOLDCO within the meaning of subsection 95(1).

f) S purchased the arm's length person's entire XXXXXXXXXX% ownership interest in the Partnership later in XXXXXXXXXX for U.S. $XXXXXXXXXX. An election under section 754 of the Code to adjust the historic U.S. tax basis of Partnership's assets for U.S. tax purposes was not made.

g) S and U contributed additional monies to Partnership at various times as capital contributions to fund Partnership's active business operations. The fair market value of Partnership increased by the amount of each of the contributions.

h) CANOLDCO amalgamated with a shell company with no assets or liabilities to form (new) CANOLDCO in an amalgamation governed by subsection 87(1). As such, the adjusted cost base to (new) CANOLDCO of its USOLDCO shares immediately after the amalgamation was deemed by paragraph 87(2)(e) to be equal to the adjusted cost base of the USOLDCO shares to CANOLDCO before the amalgamation. After the amalgamation and before the end of XXXXXXXXXX, (new) CANOLDCO was wound up into Canco. At that time Canco's adjusted cost base in the shares of CANOLDCO was CAN$XXXXXXXXXX.

i) CANOLDCO had loaned monies to USOLDCO. The loans were denominated in U.S. dollars and were convertible into USOLDCO common shares. The loans were converted into USOLDCO common shares in XXXXXXXXXX subsequent to amalgamation referred to in paragraph 18(h) above. The increase in the fair market value of the outstanding USOLDCO shares as a result of the conversion was equal to the amount of the loan outstanding immediately before the conversion.

j) Shortly after the conversion of the CANOLDCO loans to USOLDCO into USOLDCO common shares (but also in XXXXXXXXXX), USOLDCO and S were merged under state law. The merger of USOLDCO and S took place after the wind-up of CANOLDCO into Canco. Under the terms of the merger, USOLDCO's legal existence ended upon the merger and S survived as a matter of state law. The merger qualified as a "foreign merger" within the meaning of subsection 87(8.1). No gain or loss was recognized for U.S. income tax purposes by either of the parties to the merger or by either of their shareholders. Paragraph 95(2)(d.1) applied to deem S to be the same corporation as USOLDCO with respect to any future disposition of capital property acquired on the merger. Accordingly, S inherited USOLDCO's adjusted cost base in the U shares.

k) In early XXXXXXXXXX and shortly after the merger of USOLDCO into S, the Partnership distributed all of its assets to S and U and, S and U assumed all of the Partnership's former liabilities. The net assets were distributed to S and U pro rata. S immediately contributed certain of the assets (working capital, inventory, land, building, machinery and equipment, furniture and fixtures and computers) valued at approximately US$XXXXXXXXXX to U as a capital contribution for which no shares were issued to S (since U was already a wholly-owned subsidiary of S as a result of the merger referred to in item paragraph 18(j), above, and since U.S. income tax rules did not require the issuance of U shares in order for the transfer to qualify for rollover treatment). The winding up distribution by the Partnership and the subsequent capital contribution were treated as "rollover" transactions for U.S. income tax purposes in respect of which no gains or losses were recognized.

l) The former Partnership operations received by S and not transferred to U have since been identified as non-core assets which S is presently attempting to sell.

m) In XXXXXXXXXX (about two years after the winding up of the Partnership), Canco announced that it would exit U's business due to low commodity prices and over supply. Attempts were made to sell the U business or its shares. However, no acceptable offers were received and U corporation has since conducted an orderly suspension of its activities.

21. The adjusted cost base of the U shares to S for Canadian tax purposes has been estimated to be CAN$XXXXXXXXXX. Their fair market value is estimated at between CAN$XXXXXXXXXX and CAN$XXXXXXXXXX.

22. U is solvent and will remain solvent throughout the period covered by this advance ruling request.

23. U has never paid a dividend or otherwise made a distribution with respect to its shares.

24. U has an exempt deficit the amount of which has yet to be finally determined.

25. V corporation's history may be summarized as follows:

a) S acquired V by purchase in XXXXXXXXXX for non-share consideration of about U.S. $XXXXXXXXXX.

b) V is engaged in the business XXXXXXXXXX. V's business is an active business which is not an investment business within the meaning of subsection 95(1).

c) V entered into a partnership with an arm's length person in XXXXXXXXXX with a view to the construction of a new plant.

d) Difficulties were encountered in securing environmental permits for the proposed plant. A decision was reached in XXXXXXXXXX to discontinue the development of the plant.

26. The adjusted cost base for Canadian tax purposes of S's V shares is estimated to be CAN$XXXXXXXXXX and their fair market value is estimated to be CAN$XXXXXXXXXX.

27. V is solvent and will remain solvent throughout the period covered by this advance tax ruling request.

28. V has never paid a dividend or otherwise made a distribution with respect to its shares.

29. V has an exempt deficit the amount of which has yet to be finally determined.

30. W was formed as a wholly owned subsidiary by S in XXXXXXXXXX. W was capitalized upon incorporation with cash of about U.S. $XXXXXXXXXX. The original subscription proceeds were used to acquire a U.S. XXXXXXXXXX property. The property is situated in an environmentally sensitive area and has been in a holding pattern since acquisition. W has never paid a dividend or otherwise made a distribution with respect to its shares.

31. Each of the corporations in the S Group of Corporations has no "exempt surplus" "taxable surplus" or "net surplus" for the purposes of subsection 5907(1) of the Regulations at XXXXXXXXXX. S has an exempt deficit of approximately U.S.$XXXXXXXXXX at that time.

Proposed Transactions

32. U will borrow an amount of money that is not expected to exceed CAN$XXXXXXXXXX from Canco (approximately equal to but less than U's net worth) and will distribute that amount to its parent corporation, S. The borrowing will be secured solely by U's assets and will not be guaranteed or assured by any other corporation. The borrowing by U and the distribution to S will be done solely for U.S. tax reasons.

33. S will transfer the amount of the distribution received in paragraph 32 above, to T as a capital contribution.

34. S will incorporate Newco for a nominal amount and will be the owner of all of Newco's only class of shares immediately after incorporation. Newco will be incorporated in the State of XXXXXXXXXX and will be established as a U.S. resident corporation for purposes of the Act and the Treaty.

35. S will transfer all of its shares of its wholly-owned subsidiaries T and W to Newco solely in exchange for additional Newco common shares. S will retain the ownership of all of the outstanding shares of wholly owned subsidiaries, U and V. S will not elect relevant cost bases on the shares of T and W under paragraph 95(2)(c) greater than S's ACB thereof on the transfer to Newco.

36. S will transfer its directly owned active business assets and its headquarters activities to Newco solely in exchange for Newco common shares and the assumption of all of S's liabilities.

37. S will adopt a plan of complete liquidation which will be approved by Canco, S's sole shareholder.

38. S will distribute all of its assets, being all of the outstanding shares of its wholly-owned subsidiaries Newco, U and V, to Canco pursuant to the plan of complete liquidation. S will then be dissolved, also pursuant to the plan of liquidation. Canco will not claim an amount greater than its adjusted cost base in the Newco, U and V shares under paragraph 88(3)(a).

39. U will adopt a plan of complete liquidation which will be approved by Canco, U's sole shareholder. Pursuant to the plan, U will distribute all of its assets to Canco and Canco will assume all of U's liabilities. Canco will then sell U's assets at fair market value to one or more persons that are not affiliated persons with respect to Canco within the meaning of section 251.1.

40. V will sell its assets at fair market value to a person who is not affiliated with Canco and be wound up by Canco following the sale.

41. Canco will apply a portion of the allowable capital loss recognized on the winding up of U and on the sale of V against the CAN $XXXXXXXXXX of net taxable capital gain recognized in XXXXXXXXXX and reduce the amount of its XXXXXXXXXX non-capital loss carried back to XXXXXXXXXX by a similar amount.

42. S has filed a request for an advance income tax ruling with the U.S. Internal Revenue Service. The U.S. advance ruling requests a ruling that the proposed transactions described in paragraphs 32 - 41 above, will be treated as a "reorganization" described in section 368(a)(1)(D) of the Code in respect of which no gain or loss will be recognized by S, Canco, T or Newco for U.S. income tax purposes.

Purpose of the Proposed Transactions

43. The reorganization will result in the shares of U and V, non-core assets, being owned by Canco directly. This will allow management of Canco to liquidate U and sell U's assets and to effect the sale of V's operations and then the wind up V. This would permit Canco to recognize a capital loss, three quarters of which can be carried back and applied against Canco's taxable capital gains recognized in XXXXXXXXXX.

44. The proposed reorganization is part of an ongoing worldwide refocusing of Canco on its core business. The reorganization will transfer to Canco the direct ownership of U and V, two subsidiaries that presently operate outside of the core business. The reorganization will allow U.S. management to focus business expertise and attention exclusively on the remaining core business within the group of corporations to be controlled by Newco.

45.

XXXXXXXXXX

46.

XXXXXXXXXX

47.

XXXXXXXXXX

Rulings Given

Provided the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided the proposed transactions are completed in the manner described above, our rulings are as follows:

A. The distribution by U to S referred to in paragraph 32 above, will reduce the adjusted cost base of the shares of U held by S by an amount equal to the distribution. The capital contribution by S to T referred to paragraph 33 above, will be added to the adjusted cost base of the shares of T held by S.

B. The transfer by S of all of its shares of its wholly owned subsidiaries T and W to Newco solely in exchange for additional Newco common shares as described in paragraph 35 above, is governed by the rules of paragraph 95(2)(c). Subparagraph 95(2)(c)(ii) and (iii) deem the proceeds of disposition of the T and W shares to S and the cost to S of the Newco shares received to be equal to the total of the adjusted cost base of the T and W shares to S.

C. The adjusted cost base to S of its Newco shares is increased for purposes of subsection 88(3) by the fair market value of the capital and non-capital directly owned active business assets net of liabilities transferred by S to Newco in exchange for additional Newco common shares as described in paragraph 36 above.

D. The surplus accounts of S as determined under subsection 5907(1) of the Regulations are not affected by the transfer of assets by S to Newco referred in paragraph 36 above. Pursuant to subsection 5907(5.1) of the Regulations, no gain or loss will be recognized for the purposes of section 5907 of the Regulations in respect of S's transfer of its directly owned capital active business assets to Newco solely in exchange for additional Newco common shares. Since the no gain or loss is recognized under the Internal Revenue Code on any of the assets on the transfer, the transfer of non-capital assets does not affect the computation of S's "earnings" as defined in subsection 5907(1) of the Regulations. No adjustment to the "earnings" of S would be made pursuant to subsection 5907(2) of the Regulations as a result of the transfer.

E. Subsection 88(3) governs the distribution by S of all of its Newco, U and V shares to Canco pursuant to a plan of complete liquidation and followed immediately thereafter by the cancellation of all of S's outstanding shares and the dissolution of S, also pursuant to the plan of liquidation. The adjusted cost base to Canco of all of the Newco common shares acquired on the dissolution of S is equal to the total adjusted cost base of the Newco shares to S immediately before the winding up distribution. The adjusted cost base to Canco of all of the U and V common shares acquired on the dissolution of S will be equal to the total adjusted cost base of the U and V shares, respectively, to S immediately before the winding up distribution. Canco's proceeds of disposition in respect of its S shares is then equal to the sum of the proceeds of disposition amounts to S of the Newco, U and V shares.

F. The Newco, U and V shares retain their character as capital property to Canco following Canco's acquisition of the shares of those corporations on the winding up of S.

G. The distribution of U's assets to Canco and the cancellation of all of Canco's U shares on the winding up of U is governed by the rules of subsection 69(5) and subsection 5907(9) of the Regulations.

H. Canco is deemed by paragraph 69(5)(b) to have acquired all of the properties of U (whether capital or non-capital properties) at a cost equal to the fair market value of those properties immediately before the winding up.

I. Canco's capital loss on the disposition of its U shares on the winding up of U will not be denied on the basis of subsection 40(3.4) or subsection 40(3.6).

J. Canco's capital loss on the disposition of all of its U shares on the winding up of U is not a superficial loss (as defined in section 54) in respect of which Canco's loss is deemed to be nil by subparagraph 40(2)(g)(i).

K. Subparagraph 40(2)(g)(ii) does not apply to Canco's capital loss on the disposition of all of its U shares on the winding up of U.

L. Subsection 93(2) will apply to reduce the amount of Canco's loss on the disposition of its U shares on the winding up of U by the proportion of the amount, if any, by which the total exempt dividends received on the shares of S by Canco and NV and the exempt dividends received on the shares of NV by Canco that were not attributable to exempt dividends received by NV from S, exceeds:

the amount of the loss of Canco on the disposition of its shares in S that is denied pursuant to subsection 93(2),

that the adjusted cost base of the shares of U to Canco is of the aggregate adjusted cost base of the shares of U, V and Newco to Canco.

M. The distribution of V's assets to Canco and the cancellation of all of Canco's V shares on the winding up of V is governed by the rules of subsection 69(5) and subsection 5907(9) of the Regulations.

N. Canco is deemed by paragraph 69(5)(b) to have acquired all of the properties of V (whether capital or non-capital properties) at a cost equal to the fair market value of those properties immediately before the winding up.

O. Canco's capital loss on the disposition of its V shares on the winding up of V will not be denied on the basis of subsection 40(3.4) or subsection 40(3.6).

P. Canco's capital loss on the disposition of all of its V shares on the winding up of V is not a superficial loss (as defined in section 54) in respect of which Canco's loss is deemed to be nil by subparagraph 40(2)(g)(i).

Q. Subparagraph 40(2)(g)(ii) does not apply to Canco's capital loss on the disposition of all of its V shares on the winding up of V.

R. Subsection 93(2) will apply to reduce the amount of Canco's loss on the disposition of its V shares on the winding up of V by the proportion of the amount, if any, by which the total exempt dividends received on the shares of S by Canco and NV and the exempt dividends received on the shares of NV by Canco that were not attributable to exempt dividends received by NV from S, exceeds:

the amount of the loss to Canco on the disposition of its shares in S that is denied pursuant to subsection 93(2),

that the adjusted cost base of the shares of V to Canco is of the aggregate adjusted cost base of the shares of U, V and Newco to Canco.

S. As a result of the proposed transactions in and by themselves, subsection 245(2) will not apply to redetermine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and are binding on Revenue Canada provided the proposed transactions are completed by XXXXXXXXXX.

The rulings are based on the Act in its present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Nothing in this letter should be construed as implying that Revenue Canada has reviewed, accepted or otherwise agreed to:

a) the determination of the amount of the adjusted cost base of, or the amount of any dividends paid on, any share or shares referred to herein,

b) the fair value of assets transferred to or contributed to corporations referred to herein,

c) the surplus balances of foreign affiliates referred to herein, or

d) any other tax consequences relating to any facts or proposed transactions referred to herein, other than as specifically described in the rulings given above.

Comment

The shares of a foreign affiliate received by a corporation resident in Canada on the wind-up of another foreign affiliate under the provisions of subsection 88(3) are shares for which the shares of the wound-up foreign affiliate are substituted for the purposes of subsection 93(2). Similarly, shares of a foreign affiliate that are issued to a corporation on a transfer of shares of another foreign affiliate to that foreign affiliate under subsection 85.1(3) or paragraph 95(2)(c) are shares for which the shares of the transferred affiliate are substituted. Many such transactions are described in the Facts above. For example, the shares of NV issued to Canco would have been considered substituted for the shares of S on the transfer of S to NV under the provisions of subsection 85.1(3) in XXXXXXXXXX and subsequently the shares of S would in turn have been considered substituted for the shares of NV held by Canco when NV was wound-up under the provisions of subsection 88(3) in XXXXXXXXXX (see paragraph 6 above). Similarly, the shares of S held by Canco would have been substituted for the shares of USOLDCO held by Canco when the USOLDCO shares were exchanged for, or became shares of S on the foreign merger of USOLDCO and S (see paragraph 20(j) above). Moreover the shares of Newco to be received by S will be substituted for the shares of T and W when those shares are transferred to Newco (see paragraph 35 above). Finally, the shares of Newco, U and V that will be received by Canco on the wind-up of S will be shares that are substituted for the shares of S (see paragraph 38 above).

The Department recognizes that the application of 93(2) may in certain circumstances result in the duplicate application of the loss denial rules and in such cases such duplication will be eliminated on a reasonable basis as set out in Rulings L and R above.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

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