10 January 1992 External T.I. 912206A F - Loss Utilization Transactions

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.

ROUND TABLE - CGA - JANUARY 10, 1992

Officer: P Diguer

File: 7-912206

QUESTION #1

The Department allows members of a related group of corporations to use the losses of a member corporation. For example: A Ltd, a wholly-owned subsidiary of X Ltd, owns a capital property which it wishes to sell to an arm's length third party. The disposition would result in a capital gain. B Ltd, also a wholly- owned subsidiary of X Ltd, has net capital losses which it does not foresee being able to use. A Ltd therefore transfers the capital property to B Ltd. An election is made under subsection 85(1) of the Act with respect to the transfer. B Ltd makes the sale to the third party and redeems the shares issued to A Ltd on the rollover.

i)     Would the Department apply the provisions of subsection 55(2) of the Act with respect to the deemed dividend on the redemption?

ii)     If so, how does the Department reconcile this position with the fact that it allows the use or transfer of losses within a related group of corporations?

ANSWER

i)     We assume that when the election is made under subsection 85(1) of the Act as described, the elected amount is equal to the cost amount of the property. We also assume that the consideration given by B Ltd consists of preferred shares redeemable at the shareholder's option with a redemption price equal to the fair market value of the property transferred and a paid-up capital equal to the cost amount of the property.

Subsection 84(3) of the Act would apply such that B Ltd would be deemed to have paid a dividend to A Ltd on the redemption of the preferred shares of B Ltd. The exception provided in paragraph 55(3)(a) of the Act would not apply in this situation, since the series of transactions involves the disposition of property to a person with whom the corporation was dealing at arm's length. Subsection 55(2) of the Act would therefore be applicable, since the result of the dividend would be to significantly reduce the portion of the capital gain that could reasonably by considered to be attributable to anything other than income earned by B Ltd.

ii)     The 1988 explanatory notes concerning subsection 245(4) of the Act mention that there are specific rules to prevent transactions allowing the use of losses, deductions and other amounts by unrelated parties. The notes add that the losses, deductions and credits of a corporation may be used by a related Canadian corporation provided these transactions are legally effective and comply with the letter and the spirit of the exceptions. Here, the transactions would be subject to subsection 55(2) of the Act and there is no provision preventing its application.