Subsection 61.3(1)
Administrative Policy
19 March 2003 External T.I. 2002-0171825 F - DEDUCTION POUR INSOLVABILITE LIQUIDATION
A corporation with no assets and a debt owing to its sole shareholder as its only liability has that debt forgiven (resulting in an income inclusion under s. 80(13)), then is wound up. In finding that such winding up does not cause the loss of the s. 61.3 deduction, CCRA stated:
[T[he mere fact that a corporation with no assets is wound-up or dissolved will not affect the amount of the deduction that the corporation will be able to claim pursuant to subsection 61.3(1) in the taxation year in which an amount is included in income pursuant to paragraph 12(1)(z.3) and subsection 80(13).
Paragraph 61.3(1)(b)
Administrative Policy
7 November 2001 External T.I. 2001-0103805 F - SENS D'ACTIFS
A corporation in financial difficulty that no longer has any tangible property but has a balance of non-capital losses and undeducted scientific research and experimental development expenditures. Because of a debt settlement, s. 80(13) applies. In its financial statements, a future income tax asset is recognized since the parent corporation, following the winding-up of the corporation, will be able to apply such losses and credits in computing its taxable income.
In finding that the future income tax asset is included in the “assets” of the corporation for purposes of s. 61.3(1)(b), CCRA first referred to dictionary definitions of “assets” including an accounting definition referring to:
A component of the balance sheet that describes the economic resources over which the entity has control as a result of past transactions or events, and which are expected to provide future economic benefits.
CCRA then stated:
[S]ubject to subsection 248(24), we are of the view that a future income tax asset presented on the balance sheet of a corporation in accordance with the recommendations of the CICA Handbook constitutes an asset for the purpose of computing Variable B for the purposes of paragraph 61.3(1)(b).
Subsection 61.3(3) - Anti-avoidance
Administrative Policy
19 December 2013 External T.I. 2012-0468851E5 F - Deduction for Insolvency
Mco has a wholly-owned subsidiary (Aco) which is in financial difficulty, is not an insurance corporation, bank or credit union, does not have any attributes to grind under ss. 80(3) to (5), or (7) to (12), and whose sole liability is the Debt owing to a bank which it is willing to settle for cents on the dollar.
In Scenario 1, Aco uses funds lent by Mco to settle the Debt, so that there is an income inclusion under s. 80(13). In Scenario 2, Mco instead uses the same sum to purchase the Debt, so that the debt parking rule in s. 80.01(8) applies. Did CRA agree that Scenario 2 produced a better result under s. 61.3(1), as there was a larger deduction (under C of the formula) for the full amount of the Debt?
CRA first noted that the underlying premise was "questionable," as under GAAP the amount of the Debt after its acquisition by Mco might be written down. Furthermore, s. 61.3(3) might be applied (TaxInterpretations translation):
In Scenario 2, Aco apparently becomes the debtor of Mco in the 12-month period preceding the end of the taxation year, by reason of the acquisition by Mco of the original debt due to the Bank by Aco. It is also possible to claim ... that one of the reasons for Aco becoming indebted to Mco was to increase the amount which Aco had the right to deduct under subsection 61.3(1)... . In such a situation, the CRA could seek to apply subsection 61.3(3) to deny the claimed deduction for insolvency.