Subsection 88(1) - Winding-up
Cases
R. v. Mara Properties Ltd., 96 DTC 6309, [1996] 2 S.C.R. 161
The taxpayer, which was in the business of developing and selling real estate, acquired, in an arm's length transaction and for a purchase price of approximately $70,000, all the shares of a corporation ("Fraserview") whose sole asset was a parcel of land having a cost amount of approximately $7.5 million. Mara then wound-up Fraserview in accordance with s. 88(1) and immediately thereafter sold the land in an arm's length sale for approximately $3.0 million.
La Forest J., without providing detailed reasons, found that in these circumstances the property retained its character as inventory in the hands of the taxpayer with the result that it realized a non-capital loss on the sale.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Loss v. Loss | land inventory retained character after wind-up | 107 |
Hickman Motors Ltd. v. The Queen, 95 DTC 5575 (FCA), rev'd 97 DTC 5363, [1997] 2 S.C.R. 336
Hugessen J.A. rejected the taxpayer's submission that s. 88(1) established that property that was depreciable property to a subsidiary was depreciable property to the parent corporation (the taxpayer) upon the winding-up of the subsidiary.
Tory Estate v. M.N.R., 73 DTC 5354, [1973] CTC 434 (FCA), briefly aff'd 76 DTC 6312, [1976] CTC 415 (SCC)
The word "distributed" was held not to include a sale of accounts receivable for valuable consideration.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 70 - Subsection 70(3) | 128 | |
| Tax Topics - Statutory Interpretation - Noscitur a Sociis | 26 |
Administrative Policy
11 October 2019 APFF Roundtable Q. 6, 2019-0812651C6 F - CDA and wind-up of a subsidiary
In IT-126R2, the CRA states that it considers that where the formal dissolution of a corporation is not complete but there is substantial evidence that the corporation will be dissolved within a short period of time, for the purpose of subsections 88(1) and (2) the corporation is considered to have been wound up. CRA confirmed that this position as to when the subsidiary had been “wound up” also applied as to when the capital dividend account of the subsidiary was to be added to that of the parent.
The limited facts provided were insufficient to determine whether indeed this time was before the time of the filing of articles of dissolution for the subsidiary.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 87 - Subsection 87(2) - Paragraph 87(2)(z.1) | IT-126R2 applicable in determining when CDA of sub is added to parent’s CDA | 196 |
2014 Ruling 2014-0530371R3 - Combination of credit unions
Proposed transactions
Acquireco and Targetco, both of which are widely-held credit unions, wish to combine their businesses to form a single corporate entity by way of an asset sale governed by section XX of Act1. Accordingly:
- At XX on the Effective Date (and subject to separate treatment of shares of any Member exercising dissent rights): each class A and class C Share of Targetco will be exchanged for one class A and one Class D Share, respectively, of Acquireco; and each class D Share of Targetco will be redeemed for cash.
- At XX on the Effective Date as part of its winding-up, Targetco will transfer to Acquireco all its property.
- The Registrar will issue a Certificate of Business Acquisition pursuant to paragraph XX of Act1 showing that, on the Effective Date, Acquireco will have acquired the assets and assumed the liabilities of Targetco.
- Targetco will be deemed to have been dissolved on the Effective Date pursuant to section XX of Act1.
Rulings
Include that ss. 88(1)(a)(iii) and (c) apply to the winding-up. The summary states:
For the purposes of paragraph 88(1)(a), we should consider that not less than 90% of the issued shares in the subsidiary will be held by the parent "immediately before the winding-up" since all the shares of the subsidiary will be owned by the parent prior to the transfer of its assets and the assumption of its liabilities, and its ultimate dissolution… .
See summary under s. 137(4.1).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 137 - Subsection 137(4.1) | s. 137(4.1) inapplicable to Buyer of credit union who winds it up rather than becoming a member | 235 |
| Tax Topics - Income Tax Act - Section 85.1 - Subsection 85.1(1) | credit union share-for-share exchange/ cash redemption | 48 |
18 November 2014 TEI Roundtable, Q. E.4
A corporation is wound up into its parent and dissolved at a time that it had a right to receive a refund of an overpayment. Although its right to the refund thereby ceased. if "all returns have been filed up to the date of dissolution, the articles of dissolution indicate that the corporation will distribute its assets to the shareholder…after satisfying its creditors,… the shareholder is the rightful owner of the funds and the sole shareholder completes and returns a signed ‘Release and Indemnification' form to the CRA," then CRA "may" issue the refund to the parent. See summary under s. 164(1).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 164 - Subsection 164(1) | refund re dissolved sub | 330 |
26 November 2014 External T.I. 2014-0551641E5 F - Winding-up and subsection 42(1)
In accordance with IT-126R2, para. 5(b), a corporation is considered to have "been wound up" on the basis that it has been liquidated and the only reasons for not yet filing articles of dissolution is outstanding litigation. CRA considers that if the corporation subsequently settles the litigation by making a payment that otherwise qualifies as a deemed capital loss under s. 42(1)(b)(ii), it can claim that capital loss in the year of payment thereof (i.e., after it is considered for s. 88 purposes to have been wound up).
See summary under s. 88(2).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 42 | corporation permitted to claim litigation loss following effective time of winding-up | 94 |
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(2) | corporation permitted to claim a s. 42(1)(b) loss after (per IT-126R2) it has been wound up | 134 |
7 July 2014 External T.I. 2014-0518561E5 F - Superficial loss
Brothers A and B, who each hold 50% of the shares of Opco, dispose of those shares to Holdco (wholly-owned by Brother A.) Opco is wound-up into Holdco (i.e., all assets are distributed and debts settled) under s. 88(1) and all indications are that Opco will be dissolved in short order after the end of the period terminating within 30 days of the disposition (the "Period"). Were the Opco shares disposed of within the Period for purposes of the superficial loss rule? CRA stated (TaxInterpretations translation):
[W]here the particular requirements of paragraphs 5 and 9 of…IT-126R2 are satisfied and the capital loss realized by Brother A is a genuine economic loss and not a theoretical or artificial loss…Holdco would be deemed to dispose of the shares...of Opco at the time of the liquidation, being before the end of the Period.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 54 - Superficial Loss | shares of Holdco as identical property to shares of Opco/transferred corporation wound-up but not dissolved within 30 days | 315 |
2014 Ruling 2013-0505431R3 - XXXXXXXXXX
In connection with an extensive reorganization, a wholly-owned subsidiary of Pubco (Newco 2) will be wound-up into Pubco. Newco 2 will be dissolved, "but not before XX months have elapsed." Ruling that s. 88(1) will apply, with no qualifications re timing of application.
See more detailed summary under s. 55(3)(a).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) | public trading in dividend recipient does not engage exclusion in s. 55(2)(a)(iv) | 776 |
| Tax Topics - Income Tax Act - Section 66.2 - Subsection 66.2(5) - Canadian development expense - Paragraph (e) | transfer of roylaty from partly-owned partnership | 429 |
| Tax Topics - Income Tax Act - Section 97 - Subsection 97(2) | s. 97(2) applicable to contribution (no equity consideration) | 55 |
1996 Corporate Management Tax Conference Round Table, Q. 2 (C.T.O. "Wind-Up Bump Dividends")
Discussion of the effect on the "bump" of dividends paid by subsidiaries of the target corporation prior to the acquisition of control of the target corporation.
29 August 1994 T.I. 933651 (C.T.O. "Adjusted Cost Base Bump")
An estate is not considered to acquire property from the deceased because of a bequest or inheritance for purposes of s. 88(1)(d.2). S.88(1)(d.2) generally will deem the estate of a deceased person to have acquired control of a corporation at the time that the deceased person last acquired control, or was deemed by s. 88(1)(d.2) to have last acquired control, of the corporation.
12 August 1994 External T.I. 5-941549 -
Where there is a wind-up of a wholly-owned subsidiary that also owns 25% of the shares of the parent corporation, s. 88(1)(a) will deem the shares of the parent to have been disposed of by the subsidiary for proceeds equal to their cost amount. However, s. 84(3) will not apply because the parent will not have paid any amount to the subsidiary on the cancellation of its shares.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) | 40 | |
| Tax Topics - Income Tax Act - Section 87 - Subsection 87(1) | 87 |
8 April 1994 T.I. 940841 (C.T.O. "Wind-up Without Dissolution")
Where a corporation has not been dissolved because it is involved in outstanding litigation, RC will accept that it has been wound up for purposes of ss.88(1) and (2) provided that: all of the corporation's assets and liabilities other than its rights and obligations under the outstanding litigation have been distributed or assumed by the shareholder; the sole reason for the delay in dissolving the corporation is the outstanding litigation; the corporation does not own or acquire any property or carry on any activity or undertaking (other than those required to pursue the litigation) after the distribution of its assets; and the corporation is dissolved within a reasonable time following the resolution of the litigation.
18 February 1993 T.I. 940244 (C.T.O. "Winding-Up of Corporation Without Share Capital")
The winding-up of a corporation without share capital by its sole member will not be governed by s. 88(1). Instead, s. 69(5) will apply.
92 C.R. - Q.31
The cost amount of a capital property that is debt is determined for purposes of s. 88(1)(a)(iii) pursuant to paragraph (b), rather than paragraph (e), of the definition of "cost amount" in s. 248(1).
1992 A.P.F.F. Annual Conference, Q. 16 (January - February 1993 Access Letter, p. 56)
Because a licence of property or rights by a parent to its subsidiary is not extinguished until after the holder and the issuer of the license become the same person, there is considered to be a distribution of property to the parent on the winding-up.
28 April 1992 Memorandum 912857 (C.T.0. "Winding-Up of a Canadian Corporation")
Where a corporation that otherwise would be wound up is not dissolved but is kept in existence merely to hold legal title to real estate for the beneficial owner thereof, RC will consider the corporation to have been wound-up for purposes of s. 88 provided that the only reason for the continued existence of the corporation is to hold legal title to the real property, it will not own or acquire any property or incur any liabilities, or engage in or carry on any activity other than the holding of the legal title to the real property, there will be no disposition of the outstanding shares of the beneficial owner to another person and the corporation will be dissolved immediately after the legal title to the real property has been conveyed to another person.
3 September 1991 T.I. (Tax Window, No. 8, p. 21, ¶1436)
S.84(3) does not apply to deem a dividend to have been paid when shares of a corporation owned by its wholly-owned subsidiary are cancelled on the winding-up of the subsidiary.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) | 30 |
21 June 1991 T.I. (Tax Window, No. 4, p. 10, ¶1312)
Where a corporation ("S Co.") has owned real estate as a capital property and its shares are acquired by a corporation which includes gains from the sale of real estate in active business income, the bump under s. 88(1)(d) will be available on the winding-up of S Co. given that it is the facts surrounding the acquisition and holding of the property by the subsidiary rather than by the parent that are relevant.
15 April 1991 T.I. (Tax Window, No. 2, p. 24, ¶1201)
An incorporated insurance broker will be able to claim a reserve under s. 32 on its winding-up provided that s. 88(1) applies.
25 February 1991 T.I. (Tax Window, Prelim. No. 3, p. 14, ¶1126)
A corporation will be considered to have been wound up where its assets have been distributed to the shareholders, provided the corporation has not subsequently taken any action which would indicate that it will not be wound up.
27 December 1990 T.I. (Tax Window, Prelim. No. 2, p. 16, ¶1072)
Late s. 88(1)(d) designations are not permitted.
21 September 1990 T.I. (Tax Window, Prelim. No. 1, p. 11, ¶1004)
Where a taxpayer inherits the shares of an investment holding company ("Fatherco") from his father at a deemed cost equal to their fair market value on death of $1,000, transfers the shares of Fatherco to his own company ("Sonco") for a $1,000 promissory note, and then winds-up Fatherco and distributes the investment portfolio of Fatherco to Sonco, then for purposes of the bump under s. 88(1)(d), Sonco will be deemed under s. 88(1)(d.2) to have acquired control of Fatherco when the deceased father first acquired control of Fatherco given that the bequest of the Fatherco shares to the taxpayer was a non-arm's length transaction.
June 1990 Meeting of Alberta Institute of Chartered Accountants (November 1990 Access Letter, ¶1499, Q. 2)
Dividends paid to a foreign parent by the subsidiary prior to its winding-up will not reduce the "bump" under s. 88(1)(d).
15 January 1990 T.I. (June 1990 Access Letter, ¶1265)
In response to a proposal that Corporation A, which was in the business of building apartment buildings for investment purposes, indirectly acquire land held by Corporation B as inventory by acquiring the shares of Corporation B and then winding-up Corporation B, RC noted that in order for s. 88(1)(d) to apply, the property transferred to the parent must be capital property of the subsidiary at the time control is last acquired by the parent. Whether the real estate property held as inventory by Corporation B would become capital property upon entering into the share sale agreement with Corporation A would be a question of fact.
90 C.R. - Q40
The cost amount of inventory for purposes of s. 88(1)(a)(iii) is the value of such property immediately before the winding-up determined in accordance with the valuation method previously adopted by the subsidiary.
5 September 89 T.I. (February 1990 Access Letter, ¶1110)
The cancellation, on an s. 88(1) winding-up of a wholly-owned subsidiary, of a licence of intellectual property by the parent to the subsidiary, would not be considered a distribution, with the result that s. 88(1)(a)(ii) would not apply.
IT-488R "Winding-up of 90%-Owned Taxable Canadian Corporations"
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose | 33 |
IT-188R "Sale of Accounts Receivable"
An election under s. 22 is not available where debts are distributed to the parent on a winding-up under s. 88 because a sale does not take place.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 85 - Subsection 85(1) | 15 | |
| Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Account Receivable | 157 |
IT-126R2, "Meaning of 'Winding-Up' ", March 20, 1995
4. Generally, the dissolution of a corporation is authorized by the applicable federal or provincial statute only where it can be shown that
(a) the debts, obligations or liabilities of the corporation have been extinguished or provided for, or that creditors have given consent to the dissolution and
(b) after the interests of all creditors have been satisfied, all remaining property of the corporation has been distributed among its shareholders.
5. Where the formal dissolution of a corporation is not complete but there is substantial evidence that the corporation will be dissolved within a short period of time, for the purpose of subsections 88(1) and (2) the corporation is considered to have been wound up. Evidence confirming that proposed dissolution would generally require proof that the requirements for dissolution, as outlined in 4 above, have been met. …
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition | 223 | |
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(3) | 60 |
Articles
Boehmer, "Alternative to Butterfly Reorganization: Access to Investments of a Holding Company by Shareholders", Corporate Structures and Groups, Vol. IV, No. 3, p. 212
Description of considerations arising on the transfer of shares of a holding company to the operating company, followed by the winding-up of the holding company.
Roberts, Briggs, "Winding Up", The Taxation of Corporate Reorganizations, 1996 Canadian Tax Journal, Vol. 44, Nos. 2 and 3, pp. 533, 943.
Shafer, "Liquidation", 1991 Conference Report, c. 10.
Pister, "Paragraph 88(1)(d) Bump on the Winding-up of a Subsidiary", 1990 Canadian Tax Journal, pp. 148, 426.
Williamson, "Checklists: Corporate Reorganizations, Amalgamations (Section 87), and Wind-ups (Subsection 88(1))", 1987 Conference Report, c. 29.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 87 - Subsection 87(1) | 0 |
Paragraph 88(1)(b)
Administrative Policy
27 November 2018 CTF Roundtable Q. 5, 2018-0780041C6 - GAAR on PUC reduction
Will CRA invoke GAAR where paid up capital (“PUC”) is reduced in the following examples to nil in order to avoid a potential s. 88(1)(b) gain on a wind up?
Example 1
Subco was formed by Xco with an injection of capital of $1,000 (being the PUC of Subco’s shares). Parentco acquired Subco for $1. On the winding-up of Subco into Parentco, Subco had assets with a cost amount of $1,000, and no liabilities or retained earnings (nor were retained earnings realized by it after its acquisition by Parentco).
Example 2
Subco was formed by Xco with an injection of capital of $1,000 (being the PUC of Subco’s shares), and Subco realized a non-capital loss of $1,000 before Parentco acquired it for $1. Subco then realized income of $1,000 (reflected on the cost amount of its assets) that was sheltered, so that on a cumulative basis it had no retained earnings. Subco was then wound-up into Parentco. At that time, it had assets with a cost amount of $1,000 and no liabilities or retained earnings.
Example 3
Parentco owned all Subco shares which have a PUC and ACB of $1,000. Subco used $2,000 borrowed from a third party to acquire assets with a cost amount of $3,000 – which subsequently lost all their value. Parentco claimed a s. 50(1) loss $1,000 (thereby reducing the shares’ ACB to nil) prior to winding up Subco and assuming Subco's debt.
Before commenting specifically, CRA noted that if the shares of the subsidiary instead were redeemed, the excess of the redemption proceeds over the ACB of the shares would produce a capital gain if the PUC of the shares exceeded the redemption proceeds.
Example 1
CRA indicated that since the cost amount of the assets of Subco was not increased by income earned or realized by Subco after its acquisition of control by Parentco, this indicated that Parentco has made a bargain purchase in the form of the tax attributes in the assets of Subco, so that the scheme of s. 88(1)(b) dictated that a gain be realized by Parentco on the winding up of Subco in the amount of $999. Thus, CRA would apply GAAR to a reduction of PUC without payment prior to the winding up of Subco.
Example 2
Here, the increase in the cost amount of Subco’s assets of Subco resulted from income realized after Subo’s acquisition by Parentco. Even though the income was sheltered by the loss, Parentco did not realize a bargain purchase in the tax attributes of Subco’s assets If the corporate law permitted, all of Subco’s assets could have been paid to Parentco as a safe income dividend. GAAR would not be applied to a PUC reduction.
Example 3
The net cost amount of the assets of Subco is $1000, and consequently Parentco should realize a capital gain of $1000 on the winding up of Subco, under s. 88(1)(b). Parentco would essentially have taken two deductions for the same loss of $1000 – first the $1000 loss on the Subco shares under 50(1), and an additional loss of $1000 on the assets of Subco.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) | avoidance of s. 88(1)(b) where insufficient safe income was abusive | 362 |
| Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) | no challenge of a reduction of PUC of shares of DC held by TC before redemption | 210 |
6 October 2006 Roundtable, 2006-0196011C6 F - PUC Reduction Prior To Wind-Up
GAAR will not usually be applied to a pre-dissolution reduction of paid-up capital.
2003 APFF Round Table, Q.14 (No. 2003-003-0095)
Where an operating subsidiary previously had disposed of a depreciable property having a cost amount of $100,000 to its parent for the property's then nominal fair market value, and the subsidiary subsequently was wound up, the deemed ownership of depreciable property by the subsidiary on the wind-up under s. 13(21.2) would not apply for purposes of s. 88(1)(b), with the result that the $100,000 cost amount of the previously disposed-of depreciable property would not be included in the amount under s. 88(1)(d)(i) for purposes of determining whether there was a gain under s. 88(1)(b) on the wind-up of the subsidiary.
Paragraph 88(1)(c)
See Also
Harvest Operations Corp v. A.G. (Canada), 2015 DTC 5067 [at 5904], 2015 ABQB 327
A last-minute requirement of a Target lender for its loan to be repaid on closing resulted in the purchase price being reduced by $35M and that amount being lent by an affiliate of the Buyer to the Target to fund the loan repayment. That was a mistake. The $35M purchase price reduction reduced the s. 88(1)(d) bump for partnership interests held by Target when it was amalgamated with Buyer to form Amalco, so that a capital gain was realized when the partnership interests were then transferred to repay debt owing by Amalco to the affiliate.
The potential bump problem was identified on the closing date, but the solution (involving the affiliate loan proceeds being lent instead to the Buyer and then applied to subscribe for Target shares so as to fund the third-party loan) was not identified until later. Dario J found that this precluded rectification.
See summary under General Concepts – Rectification.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Estoppel | taxpayer estoppel when it claimed a tax benefit from its mistake rather than promptly seeking rectification | 194 |
| Tax Topics - General Concepts - Rectification & Rescission | requested rectification order to fix bump did not match parties' specific plan at closing | 542 |
Articles
Steve Suarez, "Canada's 88(1)(d) Tax Cost Bump: A Guide for Foreign Purchasers", Tax Notes International, December 9, 2013, p. 935
Changes to directly-held properties before acquisition of control ("AOC") (p. 941)
The requirement [in the midamble of s. 88(1)(c)] that eligible property be owned directly by the subsidiary at the time of the AOC means that the subsidiary can influence whether an 88(1)(d) bump will be available to the parent following the AOC and which properties would be eligible properties. Before the AOC, the subsidiary can change which properties it owns directly, sell or acquire properties, or take other steps to affect the parent's ability to claim an 88(1)(d) bump. It is often in the parent's interests to conclude an agreement with the subsidiary (or its shareholders) before the AOC to prevent the subsidiary from taking any actions that would impair the 88(1)(d) bump, or to require the subsidiary to take reasonable actions to enhance the 88(1)(d) bump. This form of agreement can add significant value to the parent.
Subparagraph 88(1)(c)(v)
Administrative Policy
31 October 2011 External T.I. 2011-0422981E5 F - Whether property is eligible for a bump
In 2000, an individual ("Parent") subscribed cash for common shares on the incorporation of "Parentco", with Parentco purchasing marketable securities a few months (or a few hours) later. In 2010, Parent sold his shares of Parentco to his child for FMV cash consideration (thereby realizing gain at which time the marketable securities were the only assets of Parentco.) The child shortly thereafter transferred the shares of Parentco to a newly incorporated corporation ("Childco") in consideration for a demand promissory note, and wound-up Parentco.
CRA found that the bump was not available because the marketable securities were deemed under s. 88(1)(d.2) not to be owned by Parentco at the time of its acquisition of control by Childco (as required in the midamble of s. 88(1)(c)): s. 88(1)(d.2) deemed Childco to have acquired control of Parentco when Parent acquired control of Parentco, and the marketable securities (which were subsequently acquired) "did not belong to Parentco at the moment of the acquisition of control of Parentco by Parent (being when Parentco was incorporated if Parent was the incorporator or otherwise when the first issuance of shares occurred in …2000)"... See the summary under s. 88(1)(d.2).
What if Parent owned the marketable securities, and acquired the shares of Parentco as consideration for the transfer to Parentco of the securities? After noting that the above response would not be different if control of Parentco was acquired on its incorporation, CRA stated (TaxInterpretations translation):
[I]f the time when Parent acquired control of Parentco was not the time of incorporation but the time of the first issuance of shares (for example, if Parentco was a "shelf" company and had, therefore, been incorporated by a third party unrelated to Parent not acting as Parent's agent), the marketable securities that would have been transferred in consideration for the initial issuance of Parentco's share capital would be owned by Parentco at the time that it was last deemed to have acquired control of Parentco under paragraph 88 (1) (d.2). ... [I]t would then be necessary to determine whether that investment had been owned by the subsidiary continuously from that time until Parentco's distribution of that investment to Childco on the winding-up. …
In the situation where Parent was not be considered to have acquired control of Parentco on the incorporation of Parentco and the marketable securities belonged to Parentco at the time when Parent acquired the control of Parentco, subparagraph 88(1)(c)(v) would apply if the assumptions you described in your request are taken into account, as modified by those stated in question (d). In such a situation, the marketable securities would have been acquired by Parentco from a person (Parent) who did not deal at arm's length with Childco (pursuant to subsection 88 (1.7)) other than by reason of a right referred to in paragraph 251(5)(b) where the acquisition was made as part of a series of transactions or events in which Childco had last acquired control of Parentco … . Given that the acquisition of the marketable securities was made in consideration for this issuance of shares, it is difficult to consider that this acquisition was not part of the same series of transactions or events as the acquisition of control of Parentco by Parent. Consequently, the marketable securities transferred to Parentco in consideration for the issuance of the shares of Parentco appear to us to constitute ineligible property by virtue of subparagraph 88(1)(c)(v).
…[S]ubsection 88(1.7) applies to deem Parent to not deal at arm's length with Childco even if they did not co-exist given that Parent did not deal at arm's length with Childco before the winding-up.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(c) - Subparagraph 88(1)(c)(vi) | bump unavailable given previous non-arm's length acquisition | 149 |
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d.2) | properties not bumpable as not owned at subsidiary's formation by related person | 361 |
Articles
Steve Suarez, "Canada's 88(1)(d) Tax Cost Bump: A Guide for Foreign Purchasers", Tax Notes International, December 9, 2013, p. 935
Purpose of anti-stuffing rule in s
88(1)(c)(v) (p. 942)
Another rule is meant to prevent the parent from transferring property with accrued gains to a subsidiary on a tax-deferred basis before the AOC and eliminating those gains on the wind-up through the 88(1)(d) bump. This ''anti-stuffing'' rule disqualifies any property that the subsidiary acquires (as part of the AOC [acquisition of control] series) from either the parent or a person dealing NAL [not at arm's length] with the parent. That property, as well as any property acquired by the subsidiary in substitution for such property (an issue discussed below), is excluded from being eligible property.
Subparagraph 88(1)(c)(vi)
Administrative Policy
2014 Ruling 2013-0503611R3 - Post-Mortem Planning
Overview of transactions
A testamentary spousal trust (the "Spousal Trust") whose basis in pref shares of a portfolio investment company ("Holdco") was stepped up under s. 104(4)(a) on the death of the spouse in question (B), will engage in a "pipeline" transaction under which it will transfer those shares to a Newco for the "Newco Note" and for Newco pref, and the common shareholders of Holdco (being inter vivos trusts for her son (Trust C) and daughter (Trust D)) will transfer their Holdco common shares to Newco for Newco common shares. Newco will amalgamate with Opco (at least one year later) so that marketable securities of "Amalco" may be used to pay down the Newco Note. On completion of its administration, Spousal Trust will transfer its remaining assets to its beneficiaries (C and a testamentary trust for D).
Bump on amalgamation
Pursuant to ss. 87(11) and 88(1)(d), Amalco will designate an amount to increase the cost amount of some or all of the marketable securities. "The shares of the capital stock of Holdco will not be acquired by a person described in subclauses 88(1)(c)(vi)(B)(I), (II) or (III) as part of the series of transactions or events that includes the amalgamation of Holdco with Newco." No ruling was requested on the bump.
See detailed summary under s. 84(2).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 84 - Subsection 84(2) | pipeline following death of spouse for a spousal trust where company holds mostly marketable securities | 521 |
17 February 2012 External T.I. 2011-0428561E5 - 88(1)(c)(vi) Bump Denial Rule
following the death of Ms. X, who was the second wife of her previously-deceased husband, Holdco is controlled by A and B (children of the first wife), with the balance of 1/3 of the shares held by C, who is a son of Ms. X. They received such shares of Holdco from the estate at a cost equal to the shares' fair market value. C sells his shares of Holdco to A and B for cash (or, alternatively, a promissory note). A and B then transfer their shares of Holdco to Newco, and wind-up Holdco with a view to "bumping" the adjusted cost base of certain properties of Holdco.
Respecting a question as to whether s. 88(1)(c)(vi) would preclude such "bump," CRA noted that C would be a specified shareholder of Holdco during the series of transactions and before Newco acquired control of Holdco. CRA then simply states:
...if C receives from A and B property other than property distributed by Holdco to Newco or substituted property as consideration for the sale of his shares of the capital stock of Holdco then the bump denial rule in subparagraph 88(1)(c)(vi) should not be applicable ....On this point, it is worth noting that money is excluded from the notion of "substituted property" pursuant to subparagraph 88(1)(c.3)(iii) but not from the notion of "distributed property".
31 October 2011 External T.I. 2011-0422981E5 F - Whether property is eligible for a bump
In 2000, an individual ("Parent") subscribes cash on the incorporation of "Parentco" with Parentco purchasing marketable securities a few hours later. In 2010, Parent sells his shares of Parentco to his child, who then transfers the shares of Parentco to a newly incorporated corporation ("Childco"), and winds-up Parentco.
The bump will not be available to Childco on the winding-up of Parentco because Parent (and, thus, Childco under s. 88(1)(d.2)) will be considered to have acquired control of Parentco at the time of its incorporation (and before the issuance of any shares of Parentco to Parent), at which time Parentco will not hold the marketable securities. Furthermore, the marketable securities would be ineligible property under s. 88(1)(c)(v) where they were acquired by Parentco from a person not dealing at arm's length with Enfantco (i.e., Parent) as part of a series of transactions in which Childco last acquired control of Parentco.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(c) - Subparagraph 88(1)(c)(v) | properties not bumpable as the subsidiary control was deemed by s. 88(1)(d.2) to be acquired at the same time as it acquired the properties | 592 |
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d.2) | properties not bumpable as not owned at subsidiary's formation by related person | 361 |
19 March 2003 T.I.
For the purpose of clause 88(1)(c)(vi)(A) of the Act, the reference to the term 'acquire control' means the time that the parent actually acquired de jure control of the particular subsidiary corporation and not the time that the particular parent may otherwise be deemed, by paragraph 88(1)(d.2) or paragraph 88(1)(d.3), if applicable, to have 'last acquired control' of the particular subsidiary.
17 November 2000 External T.I. 1999-000858 -
"The determination of whether a person is a 'specified person' for purposes of subclause 88(1)(c)(vi)(B)(I) of the Act is made at the time any property distributed to the parent on the winding-up or any other property acquired by any person in substitution therefor is acquired by that person."
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(10) | 41 |
29 October 1998 External T.I. 5-982135 -
Where Target transferred a depreciable property to a newly incorporated wholly-owned subsidiary (Newco) in exchange for newly issued treasury shares, the transferred depreciable property would not be considered to be property that was acquired by Newco in substitution for the shares issued by it.
Articles
Peter Lee, Paul Stepak, "PE Investments in Canadian Companies", draft 2017 CTF Annual Conference paper
Potential unavailability of “bump and run” where management are expected to retain interest in company (p. 15)
Where Target is a 10(f) corporation, then it is likely a good candidate for a "bump and run" in order to efficiently extract the FAs out of Canada (assuming there is no cross-ownership issue sufficient to trigger the bump denial rule). That last assumption may not always be realistic. As noted above, sponsors generally expect existing management to continue on in the business, and for management's economic incentives to align with theirs. Where management were significant Target shareholders pre-closing, a bump may well be unavailable. [fn 55 to p. 13 discussion of s. 88(1)(c)(vi)(B)(II): Even if management is not co-investing in actual equity, the grant of management incentives as part of employment arrangements may constitute “substituted property’ acquired as part of the series for purposes of the bump denial rules (per paragraph 88(1)(c.3)) and therefore threaten the availability of the bump. See … 2006-0196031C6… .]
Paul Stepak, Eric C. Xiao, "The 88(1)(d) Bump – An Update", 2013 Conference Report (Canadian Tax Foundation), pp.13:1-60
Sequencing of steps (p. 13:35)
The steps set out in the plan generally include the repayment of historic Target debt, the cash-out or rollover of Target options and warrants, and the exercise of dissent rights….all of the foregoing actions are typically structured to occur prior to transfer of Target shares to Bidco (and the resulting acquisition of control). This mitigates most concerns that the repaid debt or cashed-out historic securities could be substituted property, thus requiring further analysis.
Covenant of Target shareholders not to acquire additional buyer-group shares (pp. 13:35-36)
Where the ultimate buyer is a public entity or its equity or debt can be acquired without its control, the buyer should consider obtaining a covenant from shareholders of Target, executing a voting support agreement that such shareholders will not acquire any equity or debt of the buyer group for a reasonable period of time after closing.
Such a covenant usually runs from the execution date of the voting agreement until some months after the closing of the transaction. The range varies, but 12 to 24 months afterclosing is typical. This helps guard against the argument that any subsequent acquisition by a former Target shareholder of buyer securities that are substituted property is part of the same series of transactions.
Covenant of Target shareholders not to acquire additional Target shares (p. 13:36)
A buyer will often identify certain former Target shareholders that will (or will likely) acquire substituted property as part of the series, and take comfort in knowing that those shareholders own in aggregate well less than 10 percent of Target's shares. Such shareholders may often have the ability to acquire additional Target shares in the interim period, either because Target is a public company or because the shareholders hold vested options in Target. In this circumstance, the buyer may also look for a covenant from such shareholders that neither they nor NAL persons within their influence will exercise any options or otherwise acquire additional Target securities in the interim period….
Are rights under depositary agreements substituted property? (p. 13:36-37)
The depositary agreement is an escrow-like agreement that governs the treatment of cash and other assets deposited by Bidco, typically a few days before planned closing, which property will be dealt with in accordance with the plan of arrangement….
Thought needs to be given as to whether rights under the depositary agreement constitute substituted property. Stakeholders entitled to the proceeds held by the depositary, including shareholders of Target, as well as option holders and warrant holders, are often not actually paid until after the amalgamation of Bidco and Target.
Once the money is on deposit with the depositary and the transaction closes, the funds are typically held for the benefit of the stakeholders (and not Bidco). Where it is clear that there would be no further recourse to Bidco, the right to the funds on deposit should not be attributable property….
Non-specified persons in joint bid (p. 13:40)
[J[oint bidder/spin-out… arrangements all include the acquisition of distributed or substituted property by non-specified persons as part of the series. Where there is a majority-interest party in a joint bid, the minority interest investor will be a non-specified person, and both parties will be non-specified persons in a 50/50 arrangement. Similarly, the third party purchaser in a spin-out arrangement will also be a non-specified person. …
On-sale of spun assets to further (prohibited) buyer (p.13:41-42)
Consider the example where Amalco sells one of Target's divisions (Spinco) to a third party (Spinco Buyer). Amalco will presumably have done its diligence to ensure that neither Spinco Buyer nor its shareholders are prohibited persons. However, if Spinco Buyer sells the acquired division (or Spinco Buyer itself is sold, subject to the 10 percent attributed property safe harbour) to a fourth party as part of the series, that sale (which is two degrees removed from the actual acquisition of Target) could taint the bump if the fourth party (or its shareholders, depending on the circumstances) is a prohibited person. … This will be the case even if the transferred division was not part of the bumped property!
Brian R. Carr, Julie A. Colden, "The Bump Denial Rules Revisited", Canadian Tax Journal (2014) 62:1, 273-99.
Purpose of bump denial rules (p. 276)
…Generally, the bump denial rules were introduced into the Act to prevent so-called back-door butterflies.
…A "purchase butterfly" facilitated the transfer of a portion of the assets of a corporation ("the transferor") to another corporation ("the transferee") in conjunction with the sale of the shares of either the transferor or the transferee without the incidence of corporate-level tax. A similar result could be obtained through a bump transaction pursuant to which a purchaser acquired a target corporation from its shareholder, bumped the tax cost of the target corporation's underlying non-depreciable capital property to its fair market value, and then sold the bumped property back to the shareholder without incurring corporate-level tax.
Steve Suarez, "Canada's 88(1)(d) Tax Cost Bump: A Guide for Foreign Purchasers", Tax Notes International, December 9, 2013, p. 935
Policy of bump denial rules (p. 946)
The policy behind the bump denial rule is deceptively simple: The parent should not be able to buy and wind up the subsidiary, claim an 88(1)(d) bump on its property, and then sell some of that property back to the subsidiary's former shareholders….
Prohibited persons/prohibited property (p. 947)
…At a core level:
- prohibited persons are shareholders of the subsidiary at a time that is both before the AOC and during the AOC series; and
- prohibited property is property distributed to the parent on the wind-up (that is, acquired from the subsidiary when it is merged or wound up into the parent).
The basic thrust of the bump denial rule is that property of the subsidiary that is distributed to the parent on the wind-up (herein, distributed property) should not, as part of the AOC series, be acquired by persons who were significant subsidiary shareholders at a time during the AOC series and before the parent acquired control of the subsidiary. The term ''significant'' for this purpose essentially means holding 10 percent or more of a class of the subsidiary's shares, individually or collectively.
Mark Jadd, Richard Lewin, "Anatomy of a Deal: Income Tax Issues Facing a Non-Resident Purchaser of a Public Canadian Corporation", International Tax (CCH), October 2006, No. 30 p. 9.
Nathan Boidman, "Unwinding or Otherwise Dealing With 'Sandwich' Structures Resulting From an International Merger or Acquisition", Tax Notes International, 10 May 2004, p. 601: Discussion of restrictions on bump where a Canadian corporation has been acquired by a foreign acquiror.
Clause 88(1)(c)(vi)(B)
Subclause 88(1)(c)(vi)(B)(II)
Administrative Policy
28 November 2010 CTF Annual Roundtable Q. 19, 2010-0386041C6 - Deemed ownership of shares
Is the reference to "all of the shares" in s. 88(1)(c)(vi)(B)(II) a reference only to shares of a subsidiary that is subsequently wound-up into its parent? CRA responded, "no:"
The reference to "all of the shares" in subclause 88(1)(c)(vi)(B)(II) is a reference to any shares owned by a person who acquires property distributed to the parent on the winding-up. The hypothetical person will be considered to be a specified shareholder of the subsidiary if it holds 10% or more of the issued shares of the subsidiary or of any other corporation that is related to the subsidiary and that has a significant interest in the issued shares of the subsidiary after applying the various presumptions in paragraphs (a) to (e) of that definition.
Articles
Paul Stepak, Eric C. Xiao, "The 88(1)(d) Bump – An Update", 2013 Conference Report (Canadian Tax Foundation), pp.13:1-60
Cash calls on private equity investors who also are prohibited persons (pp. 13:38-39)
Figure 9
Private equity (PE) buyers can raise challenging bump issues, especially funds with more complicated ownership structures….
[A] PE fund will typically need to make a capital call from its investors each time it completes an acquisition. PE investors will not be specified persons because they will not be related to Bidco (see figure 9). If the capital call results in an acquisition of property by a PE investor, and if such acquisition is part of the series, no bump would be available if any of the PE investors (alone or collectively) are prohibited persons.
[T]he 10 percent attributed property safe harbour is clearly applicable. However, where the test is not met, or where there is uncertainty, it will be necessary to do due diligence concerning the investors of the fund to ensure that none of them is a prohibited person. This can be difficult because PE funds are loathe to disclose the identity of their investors….
Confidentiality limitations on determining whether private equity investors are prohibited investors (p. 13:40)
[F]or confidentiality reasons, a fund cannot typically approach its investors to perform bump diligence until after a deal has been signed. If the fund discovers a cross-ownership issue in the interim period, it is unlikely to be able to walk from the deal (unless it specifically obtains this right when negotiating the arrangement agreement). Unless the fund can prevent an investor from participating in the particular investment, it may not have a way to consummate the transaction in a bump-friendly manner.
Brian R. Carr, Julie A. Colden, "The Bump Denial Rules Revisited", Canadian Tax Journal (2014) 62:1, 273-99.
Overview of aggregation rule (p. 283)
In addition, the bump will be denied if distributed property or substituted property is acquired as part of the series by two or more persons (other than specified persons) who, if treated as one notional person, would constitute a specified shareholder of the target at any time during the series and before the parent last acquired control of the target. This means that in analyzing whether the bump is available, in addition to specified shareholders, other persons acquiring prohibited property and their share ownership of the target (if any) should be considered. For example, employees could receive shares of a parent, or be issued employee stock options, as a bonus in the context of an acquisition such that the shares or options would not constitute specified property. If such employees owned in aggregate 10 percent or more of a class of shares of the target prior to its acquisition, the bump would be denied. No connection or relationship between the persons acquiring prohibited property for the purpose of this aggregation rule is necessary.
Aggregation of different property types (p. 284)
Moreover, any category of distributed or substituted property acquired as part of the series must be taken into account and aggregated. For example, if the employees referred to above (employees receiving stock options) held in total 6 percent of the shares of the target, and other shareholders of the target that in total held 4 percent of the shares of the target prior to its acquisition also subscribed for shares of an upstream foreign corporation as part of the series, the bump would be denied. In those circumstances, two or more persons who, if treated as one notional person, would be a specified shareholder, would have acquired substituted property. There is also no specific quantification relevant in respect of the distributed property or substituted property acquired by an aggregation of persons. The aggregation of persons need not acquire shares or options in respect of the acquiror that total at least 10 percent of the value of the target (for example). The relevant measure is the percentage of the shares of the target held prior to the acquisition of control by persons acquiring prohibited property as part of the series.
Look-through to pre-AOC subscribing partners (p. 284)
This aggregation rule can be relevant where the ultimate acquiror is a partnership such as a private equity fund. If the partnership raised equity financing for the acquisition by requiring its partners to subscribe for additional partnership units, the bump would be denied if the partners in aggregate held 10 percent or more of the shares of the target before the acquisition of control and as part of the series. Since the partnership units would be substituted property, an aggregation of persons (that, if treated as one notional person, would be a specified shareholder) would acquire substituted property as part of the series….
2012-0451421R3: "part of the relevant series" (p. 284)
In a recently released technical interpretation, the Canada Revenue Agency (CRA) has provided some comfort on the issue of whether substituted property acquired by persons described in subclause 88(1)(c)(vi)(b)(ii) would occur as part of the series. Specifically, in the document, the CRA provided an opinion (but not a ruling) that the acquisition of shares or debt of a parent (and other relevant entities) by persons that would not be described in clause 88(1)(c)(vi)(b) if subclause (ii) was ignored (for example, if the persons were not specified shareholders) would "not necessarily" occur as part of the relevant series….
Non-aggregation of shares held by non-arm's length persons (p. 285)
For the purpose of the application of the aggregation rule in subclause 88(1)(c)(vi)(b)(ii), shares held within a non-arm's-length group are not aggregated. That is, in determining whether a person is a specified shareholder, shareholdings of all non-arm's-length persons are aggregated. If the 10 percent threshold is met, then all non-arm's-length group members are specified shareholders of the target. If the 10 percent threshold is not met within the non-arm's-length group, in applying the aggregation test in subclause 88(1)(c)(vi)(b)(ii ), only the shareholdings of the persons actually acquiring distributed or substituted property are aggregated (not the shareholdings of non-arm's-length persons)….
Subclause 88(1)(c)(vi)(B)(III)
Administrative Policy
2013 Ruling 2011-0397081R3 - Bump Transaction
Buyer
Buyer is a listed non-resident corporation, and owns all but the exchangeable shares of a Canadian public corporation ("BuyerSub"). Following preliminary transactions carried out with a view to the Target acquisition, Buyer held Class A common shares and an interest-bearing note (the "BidAmalco Acquisition Note") of "BidAmalco" (which might have been a ULC).
Target/CanSub2 acquisition
Target, a Canadian public corporation, owned all the outstanding shares of CanSub2, which was a public company which it had acquired under a Plan of Arrangement under which, following a s. 86 exchange of CanSub2 shares for CanSub2 Class A and Spinco1 Shares and the CanSub2 Class A Shares were transferred to Target for cash and Target Shares. As a result of this arrangement, X2 acquired X% of the Target Shares. CanSub2 owns all the issued and outstanding shares of XXSub2 which in turn owns all the issued and outstanding shares of XXSub3. XXSub2 owes the XXSub2 Debt.
Target also owned all the outstanding shares of two other public companies which it had acquired (CanSub1 and CanSub3) and Spinco2 (which in turn owned SpincoXX). CanSub1 owned all the outstanding shares of XXSub1.
Target entered into lock-up agreements with the directors and officers of Target and X2, pursuant to which such persons cannot, among other things, purchase, directly or indirectly, for a period of X years after the Effective Date, Buyer Shares, exchangeable shares of BuyerSub, debt of Buyer or any other securities convertible or exchangeable into such securities or that derive their value, directly or indirectly, from such securities.
Preliminary to Target acquisition
Target transferred cash and certain Target assets to "Spinco2" in consideration for Spinco2 shares and the assumption of liabilities, electing under s. 85(1). Spinco2 subscribed cash for common shares of a wholly–owned non-resident subsidiary ("SpinForco") and of SpincoXX. (Various other preliminary transactions, including payment of exempt surplus dividends, and elections of subsidiaries to be disregarded entities for U.S. tax purposes, are not described.) CanSub1 and CanSub2 were then wound-up under s. 88(1) so that their assets could be bumped in 5 below.
Plan of Arrangement for Target
- Each Target Share held by a dissenting shareholder was deemed to be transferred to BidAmalco in consideration for a right to be paid fair value. It was a condition to the Plan of Arrangement that holders of not more than XXXXXXXXXX% of the Target Shares shall have exercised dissent rights.
- Target Options were transferred to Target for cash and Spinco2 Shares or physically exercised (with Target Shares acquired on such exercise automatically transferred to BidAmalco in consideration for cash; and an undertaking of BidAmalco to deliver Spinco2 Shares).
- Each Target Share not held by BidAmalco was exchanged, pursuant to section 86, for one Target Class A Share and one Spinco2 Share.
- Each Target Class A Share was transferred to BidAmalco for cash consideration.
- Target was wound-up into BidAmalco and BidAmalco designated an amount in respect of "Bumped Property" owned by Target immediately before the wind-up (including XXSub1 and XXSub2, being non-resident subsidiaries) in BidAmalco's return of income for its taxation year that includes the day of Target's wind-up.
- XXSub1 and XXSub2 merged to form Mergeco, with XXSub1 being the surviving entity.
- Buyer XX Holdco transferred the shares of Buyer XX Opco to Mergeco in consideration for common shares in the capital of Mergeco.
- BidAmalco transferred property (but not Mergeco shares) as partial repayment of the BidAmalco Acquisition Note.
Spinco2 has entered into an agreement with Buyer providing that it will not purchase, directly or indirectly, for a period of two years following the Effective Date, Buyer Shares, exchangeable shares of BuyerSub, debt of Buyer or any other security convertible or exchangeable into such securities or that derive their value, directly or indirectly, from such securities [see s. 88(1)(c)(vi)(B)(III)(2) and note shareholders-in-common of Target and Spinco2].
S. 88(1)(d) ruling
including statement that "property that will be distributed to BidAmalco on the winding-up will not be ineligible property for purposes of paragraph 88(1)(c) solely as a result of any of the Facts or Reorganization described herein."
Articles
Brian R. Carr, Julie A. Colden, "The Bump Denial Rules Revisited", Canadian Tax Journal (2014) 62:1, 273-99.
Specified shareholder must not also own 10% of shares of an acquiror (either alone or with non-arm's length persons): s. 88(1)(c)(vi)(B)(III)(1)
(p. 286)
First, a corporation (other than a specified person) that has a specified shareholder in common with a target is a prohibited person. That is, if a shareholder owns 10 percent of a class of the shares of the target and also own 10 percent of the shares of an unrelated corporation that is not a specified person, the unrelated corporation cannot acquire distributed or substituted property as part of the series.
Aggregating to notional common specified shareholder: s. 88(1)(c)(vi)(B)(III)(2) (p. 286)
Further, where two or more persons (other than specified persons) would, if treated as one notional person, be a specified shareholder of a corporation after the acquisition of control, and such notional person would also be a specified shareholder of the target, such corporation will be a prohibited person. Consider the situation, for example, where (1) shareholder A owns 5 percent of a class of shares of the target and also owns 2 percent of the shares of a particular corporation, and (2) shareholder B owns 5 percent of the same class of shares of the target and also owns 8 percent of the same class of shares of the corporation. If shareholders A and B were treated as one notional person, the notional person would be a specified shareholder of the target and of the corporation. As a practical matter, in the context of public company transactions, it will be virtually impossible in many situations to monitor compliance with this rule.
Paragraph 88(1)(c.2)
Subparagraph 88(1)(c.2)(i)
Articles
Paul Stepak, Eric C. Xiao, "The 88(1)(d) Bump – An Update", 2013 Conference Report (Canadian Tax Foundation), pp.13:1-60
Parent relatedness to mooted specifed person from moment of its incorporation if not a shelf corp. (p. 13:22-23)
[A]t the time the parent is incorporated, technically it would not be related to anyone such that no person will be related to the parent throughout the identified period. However, the CRA's administrative practice related to this issue is to consider the incorporating person to control and therefore be related to a corporation on incorporation, even where no shares are issued at that time. [fn 70: ...9700405 and ... 2002-0118145.]…Some care should be taken in certain jurisdictions where normal practice is for the incorporator to be a person unrelated to the buyer group (for example, the buyer's local counsel). While the argument might be made that the incorporator is acting as agent on behalf of the buyer, such an argument may be more difficult when applied to the purchase of an "off the shelf corporation.
Brian R. Carr, Julie A. Colden, "The Bump Denial Rules Revisited", Canadian Tax Journal (2014) 62:1, 273-99.
Related status before incorporator's share issuance (p. 297)
The joint [CBA/CICA] committee noted in its submission that there are deficiencies in the drafting of clause 88(1)(c.2)(i)(C) in that no person can be related to the parent corporation at the time that it is incorporated; shares of the parent must first be issued in order for a person to become related. On this interpretation, the legislative proposal would never have application. However, there is a principle of statutory interpretation against such a reading of the provision…. [citing Grunwald v. Canada, 2005 FCA 421]
Steve Suarez, "Canada's 88(1)(d) Tax Cost Bump: A Guide for Foreign Purchasers", Tax Notes International, December 9, 2013, p. 935
Examples of prohibited persons (pp. 947-8)
The most useful way to illustrate the wide range of potential prohibited persons is by using the example shown in Figure 6, as annotated by the discussion in the text accompanying footnotes 42-47 and 51.
1. Persons Owning (or Deemed to Own) 10-Plus Percent of a Relevant Class of Shares Pre-AOC [acquisition of control]
. The prohibited persons concept centers on persons who are specified shareholders of the subsidiary at a time that is both before the AOC and during the AOC series (herein, a pre-AOC subsidiary specified shareholder)….
- Ownership of Shares in Related Upstream Corporations: a person is deemed to be a specified shareholder of a particular corporation if that person meets the 10 percent share ownership (or deemed share ownership) threshold in any other corporation that both:
- is related to the first corporation; and
- has a ''significant direct or indirect interest'' in the first corporation — that is, an ''upstream'' related corporation. [fn 44: …Investor owns 10 percent of the shares of a corporation (ControlCo) that:
- is related to the subsidiary (since ControlCo has legal control of the subsidiary); and
- has a significant direct or indirect interest in the subsidiary. NAL [non-arm's length] Person 2 (who deals at NAL with Investor) is deemed to own Investor's shares of ControlCo, and is thus in the same position as Investor.]
2. Other Prohibited Persons
The prohibited person definition goes beyond pre-AOC subsidiary specified shareholders to include the following persons:
(a) any number of persons whose collective share ownership, if aggregated in the hands of one person, would make that one person a pre-AOC subsidiary specified shareholder [fn 45: For example, see A, B, and C collectively in Figure 6 since their shareholdings would, if aggregated, make the holder a specified shareholder of the subsidiary by virtue of owning more than 10 percent of its shares. If A, B, and C all acquired any prohibited property as part of the AOC series, the bump denial rule would apply.]
(b) a corporation, other than the subsidiary, in which a pre-AOC subsidiary specified shareholder is, at any time after the AOC and during the AOC series, a specified shareholder [fn 46: See, e.g., Corp. 1 in Figure 6, which is a corporation more than 10 percent of the shares of which are owned by a pre-AOC subsidiary specified shareholder (Investor) following the AOC.]; or
(c) a corporation, other than the subsidiary, if:
- persons described in (a) above acquired shares as part of the AOC series; and
- those acquired shares would, if aggregated in the hands of one person, make that single notional person a specified shareholder of that corporation at any time after the AOC and during the AOC series. [fn 47: For example, any corporation of which A, B, and C collectively own 10 percent or more of the shares of any class, if they acquired those shares as part of the AOC series.]
Again, in all cases, the parent and anyone dealing at NAL with the parent will not be a prohibited person.
Subparagraph 88(1)(c.2)(ii)
Articles
Brian R. Carr, Julie A. Colden, "The Bump Denial Rules Revisited", Canadian Tax Journal (2014) 62:1, 273-99.
Look-through specified shareholder definition v. s. 88(1)(c.2)(ii) entity approach (p. 288)
As a result of the interaction of subparagraph 88(1)(c.2)(ii) and the definition of "specified shareholder," it is not clear whether or when the bump denial rules may apply in respect of an acquisition by a partnership.
…For example,… if two or more shareholders of the target (other than specified persons) whose shareholdings in the target were at least 10 percent in aggregate were members of a partnership and the fair market value of their aggregate partnership interests was at least 10 percent of the fair market value of all partnership interests, the bump would be precluded as a result of the combined operation of sub-subclause 88(1)(c)(vi)(B)(iii)(2) and subparagraph 88(1)(c.2)(ii). That is, a deemed corporation of which two or more persons (other than specified persons), if treated as one notional person, would constitute a specified shareholder, and would also constitute a specified shareholder of the target, would have acquired prohibited property….
Partnership not qualifying as specified person (p. 289)
[T]he rule in subparagraph 88(1)(c.2)(ii) that deems a partnership to be a corporation is applicable to the definition of "specified person" (subparagraph 88(1)(c.2)(i)). For example, a partnership (such as a private equity fund) that establishes an acquisition corporation should be a specified person because, as a deemed corporation, the fund should be related to the acquisition corporation….[W]here a fund establishes a toehold position in a target of at least 10 percent, causing it to constitute a specified shareholder prior to the acquisition of control of the target… [i]f the fund does not control the acquisition corporation, it likely will not constitute a specified person. Consequently, any acquisition of attributable property (other than specified property) by the fund would preclude the bump.
Subparagraph 88(1)(c.2)(iii)
Clause 88(1)(c.2)(iii)(A)
Articles
Paul Stepak, Eric C. Xiao, "The 88(1)(d) Bump – An Update", 2013 Conference Report (Canadian Tax Foundation), pp.13:1-60
Meaning of "significant" in s. 88(1)(c.2)(iii)(A) (pp. 13:46-48)
[F]oreign Parent owns Interco, which owns Bidco. Bidco has acquired a toehold interest in Target of, say, 6 percent. Arm's-Length Investor proposes to partially finance the transaction by subscribing for 100 percent of a class of convertible preferred shares of Interco. [fn 108: Using convertible preferred shares in the example rather than simple preferred shares ensures that the shares are not carved out of the modified specified shareholder definition pursuant to paragraph 88(1)(c.8)] …
[I]t is reasonable to expect that at some point prior to the acquisition of control, Bidco's paragraph 251 (5)(b) rights to acquire Target's shares will crystallize, and at that time Bidco, and therefore Interco, will be related to Target. If Arm's-Length Investor is deemed to be a specified shareholder of Target at that time, then it is a prohibited person (as a pre-acquisition-of-control specified shareholder of Target that is not a specified person) who acquired bad property (the preferred shares) as part of the series, and the bump will not be available. …
Does Bidco's toehold interest in Target constitute a "significant direct or indirect interest" if it is below 10 percent? … Given that the lowest threshold for significant interest in the Act is 10 percent, it is reasonable to argue that the threshold for "significant direct or interest interest" should be no less than 10 percent… .
Mitigate s. 88(1)(c.2)(iii)(A) risk by postponing kick-in date of conversion right (p.13:48)
One … approach [to mitigate risk in the above scenario] is to ensure that the non-specified person investor, Arm's-Length Investor, does not become a specified shareholder until after the acquisition of control. This could be achieved by issuing convertible debt to Arm's Length Investor that is not convertible until after the acquisition of control.
Clause 88(1)(c.2)(iii)(A.2)
Articles
Paul Stepak, Eric C. Xiao, "The 88(1)(d) Bump – An Update", 2013 Conference Report (Canadian Tax Foundation), pp.13:1-60
Remedying under s. 88(1)(d)(c.2)(iii)(A.2) of pre-winding-up agreement for sale of bumped shares
[P]rior to the [s. 88(1)(d)(c.2)(iii)(A.2)] amendment, subsidiaries of Target were considered to be specified shareholders of Target whenever Target had a controlling shareholder. This led to concerns that the actions of the subsidiaries of Target prior to the acquisition of control could cause a bump issue if such a subsidiary acquired substituted property as part of the series….
Example 9
Holdco owns all of the shares of Subco and Subco in turn owns all the shares of Sellco. As a condition of the sale of the Subco shares to Bidco, Holdco and Subco/Bidco will enter into an agreement to sell the shares of Sellco to another arm's length purchaser (Pco), which sale will occur after the winding up of Subco into Bidco. Prior to the entering into the purchase agreement, Pco will not be a specified shareholder of Subco. …
The issue in this situation is that Pco's right to acquire the shares of Sellco results in Pco becoming a specified shareholder of Subco, even though Pco does not have any direct or indirect interest in the shares of Subco, Holdco or Bidco….As Pco and Holdco would be related to the same corporation (Sellco), they would be deemed by subsection 251(3) to be related to each other. As a result Pco would be treated as owning all of the shares of Subco owned by Holdco and would therefore be a specified shareholder of Subco before control of Subco is acquired by Bidco. Pco is therefore a prohibited person who will acquire distributed property (the shares of Sellco) as part of the series, and the bump is denied.
Finance provided a comfort letter dated August 13, 2004, in respect of the above facts, indicating that where a person has a right to acquire a share of a corporation (the "downstream corporation") controlled by another corporation (the "upstream corporation") and the downstream corporation does not have a direct or indirect interest in any of the issued shares of the upstream corporation, the right should not result in the person becoming a specified shareholder of the upstream corporation.
Paragraph 88(1)(c.3)
Subparagraph 88(1)(c.3)(i)
Administrative Policy
2012 Ruling 2012-0451421R3 - Purchase of Target and bump
Ruling that Parent guarantees of the amended notes of Target will not constitute substituted property as described in s. 88(1)(c.3). See detailed summary under s. 88(4)(b).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 212.3 - Subsection 212.3(18) - Paragraph 212.3(18)(c) | deemed investment on amalgamation of subsidiary | 757 |
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(4) - Paragraph 88(4)(b) | Target Amalco 2 formed post-AOC and pre-bump (occurring on amalgamation of Target Amalco 2 with Bidco) is a continuation its predecessors for s. 88(1)(c) midamble purposes/prepackaging transactions before formation of Target Amalco 2/Target asset buyers agree not to purchase Target shares | 911 |
31 January 2000 External T.I. 1999-001096 -
"Where an earn-out or any similar type of agreement is clearly for the sole purpose of providing a mechanism to determine the fair market value of the shares of the subsidiary (where the fair market value of such shares cannot otherwise be determined), such property would not normally be considered as a property described in either subparagraphs 88(1)(c.3)(i) or (ii) of the Act. This would not be the case where an earn-out is used as a mechanism to distribute additional amounts based on the future sale or value of some particular property."
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(c.3) - Subparagraph 88(1)(c.3)(ii) | earn-out | 93 |
Articles
Warren Pashkowich, Daniel Bellefontaine, "Participation-Based Payments: What Are They and How are They Taxed", 2017 Conference Report (Canadian Tax Foundation), 9:1-25
Potential treatment of earnout as substituted property (p. 9: 12)
[T]here can be a denial of the bump where property distributed on the amalgamation or winding up of a target entity or property, other than specified property, acquired in substitution therefor (“substituted property”) was acquired by one or more “specified shareholders” [fn 51: [F]or the purposes of the bump denial rules, in very general terms, each shareholder’s interest in the target is aggregated to form a notional shareholder, such that if a group of persons who collectively own 10 percent or more of the shares of the target (before it is acquired by the parent) acquire the target’s property or substituted property, the bump can be denied.] of the target entity as part of the series that included the windup or amalgamation. Substituted property includes property that, at any time after the acquisition of control of the target entity, derives more than 10 percent of its fair market value from the property distributed to the parent.
An earnout could be interpreted as deriving more than 10 percent of its value from the property of a target entity, depending on its terms. However, the CRA has opined favourably with respect to this issue. In the CRA’s view, if the sole purpose of the earnout is to establish the fair market value of the shares of the subsidiary on closing, then the earnout will not normally be substituted property. [fn 52: 1999-0010965] However, this favourable view would not apply if the earnout were used as a mechanism to distribute additional amounts from the future sale or value of some particular property.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(g) | 321 |
Ian Crosbie, "Recent Transactions of Interest, Part I", 2015 CTF Annual Conference paper
Application of substituted property rules where consideration paid to target (Kodiak) shareholders was over 10% of shares of U.S. acquiror (Whiting) (p. 15:7)
[T]he consideration provided to Kodiak shareholders consisted of shares of a U.S. corporation, which do not qualify as specified property under paragraph 88(1)(c.4) for the purposes of the substituted property rules in paragraph 88(1)(c.3). Kodiak represented more than 10 percent of the value of the combined entity, meaning that more than 10 percent of the value of the Whiting shares issued to the Kodiak shareholders was attributable to the Kodiak shares. Accordingly, the Whiting shares were attributable property for the purposes of subparagraph 88(1)(c.3)(i). Thus, under the plan of arrangement, all of the the Kodiak shareholders acquired substituted property for the purposes of the bump rules, and the conditions in paragraph 88(1)(c) for the bump were not satisfied.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 212.3 - Subsection 212.3(2) | 689 |
Paul Stepak, Eric C. Xiao, "The 88(1)(d) Bump – An Update", 2013 Conference Report (Canadian Tax Foundation), pp.13:1-60
10% attributable property test applied only during the series of transactions (p. 13:12-13)
[W]hen read in a textual, contextual and purposive manner, it would be reasonable to construe the "at any time" wording of the 10 percent test such that the test should not be affected by transactions or events that are not considered part of the series. This construction seems reasonable as a matter of statutory interpretation, and in that respect the absence of an overt series rule in subparagraph 88(l)(c.3)(i) should not be considered to imply otherwise. …
[I]t is for the purpose of determining whether a person has acquired substituted property that subparagraph 88(l)(c.3)(i) extends the meaning of the concept of substituted property contained in subparagraph 88(l)(c)(vi). Accordingly, subparagraph 88(l)(c.3)(i) presumably must be read in the context of subparagraph 88(l)(c)(vi) and take into account the time period, including the series referred to in that subparagraph.
Series for exchangeable shares of Target ending only when final exchange occurs (p.13:15-16)
[A] question has been raised whether the bump might be available where Foreign Parent acquires Target in an exchangeable share transaction...
[O]ne issue is that the initial issuance of exchangeable shares in consideration for Target shares and the final exchange of the exchangeable shares for Foreign Parent shares may be regarded as part of the same series….The final exchanges could be many years after Target is acquired and it would be difficult, if not impossible, to predict or control relative fair market values… .The Joint Committee's submission on this point was not addressed… .
No safe harbour for subsequent conversion of convertible debt (pp. 13:19)
Where the acquisition debt issued is a convertible debt, the subsequent conversion of such debt into shares of the borrower could still cause the application of the bump-denial rule if, at the time of the conversion, the shares derive more than 10 percent of their value from distributed property on the basis that the subsequent conversion is part of the series that includes the winding-up of the subsidiary.
Earnout as potential substituted property (p. 13:41-42)
[T]he concern is that an earnout right could constitute substituted property as the value of the earnout right is based on future performance of the business acquired….
A buyer should therefore be able to utilize an earnout without putting a bump at risk, provided the buyer is comfortable (and can presumably demonstrate to the CRA with evidence if asked) that the earnout is structured solely to provide a mechanism to determine the fair market value of the shares at closing.
Brian R. Carr, Julie A. Colden, "The Bump Denial Rules Revisited", Canadian Tax Journal (2014) 62:1, 273-99.
Upstream equity or debt as substituted property (p. 280)
Any upstream equity interests (such as shares of the parent or other upper-tier corporate or partnership interests) or debt of any upstream entities owned after the acquisition of control will constitute substituted property since the value of such property will be considered wholly or partly attributable to distributed property.
Steve Suarez, "Canada's 88(1)(d) Tax Cost Bump: A Guide for Foreign Purchasers", Tax Notes International, December 9, 2013, p. 935
10%-plus properties as prohibited property (p. 951)
2. Property Deriving More Than 10 Percent of Its FMV From Distributed Property Post-AOC [acquisition of control]. Typically, the main concern with the scope of prohibited property is property that derives more than 10 percent of its FMV from distributed property at a time following the AOC and when owned by the prohibited person (herein, 10 percent-plus property). One of the most common examples of 10 percent-plus property is shares of an acquirer of the subsidiary (or of that acquirer's own controlling shareholder)….
Exclusions in s. 88(1)(c.3)
Some properties specified in the ITA that are 10 percent-plus property are excluded from being deemed substituted property. …
These are important exceptions, since they allow, for example, the parent to issue shares or debt in exchange for money in order to finance an acquisition of the subsidiary, without having to worry about whether the persons acquiring the shares or debt are prohibited persons. They also allow a taxable Canadian corporation to issue shares of itself directly in exchange for shares of the subsidiary, which permits Canadian acquirers to use their shares as currency to acquire the subsidiary without creating prohibited property. [fn 57: Moreover, since for these purposes a ''share'' includes a right to acquire a share (paragraph 88(1)(c.9) of the ITA), employee stock options to acquire subsidiary shares can be exchanged for employee stock options to acquire parent shares. Note, however, that this exception does not extend to stock options issued for other consideration — for example, options issued to subsidiary employees as an incentive to remain with the company post-AOC [acquisition of control].]
Exceptions do not extend to foreign securities (p. 953)
Unfortunately, none of these exceptions apply to shares or debt issued by non-Canadian corporations (other than the exception for debt issued solely for money). As such, securities of a foreign entity that is the direct or indirect acquirer of the subsidiary will generally constitute deemed substituted property, unless either:
- the securities are debt issued in exchange for money; or
- the foreign entity is so much larger than the Canadian target subsidiary that the foreign entity's securities cannot be said to derive more than 10 percent of their value from the Canadian target subsidiary's assets (that is, distributed property).
The result is that Canadian acquirers have an advantage over foreign acquirers in that they can use their shares and debt to pay for the shares of Canadian targets and still be able to claim the 88(1)(d) bump. If Canadian target shareholders who collectively hold 10 percent or more of the Canadian target's shares receive shares or debt of a foreign acquirer for their Canadian target shares, and if those foreign acquirer shares or debt derive more than 10 percent of their value from the Canadian target's properties, persons who in aggregate constitute a pre-AOC subsidiary specified shareholder will have received prohibited property, and the bump denial rule will apply. Hence, a foreign acquirer can generally use the 88(1)(d) bump only if it pays cash or if it acquires a Canadian corporation representing less than 10 percent of the acquirer's own value.
Example of problems arising on foreign acquisition (pp. 953-4)
Figure 9 illustrates some of the typical problems that can arise when a foreign acquirer (Foreign Parent) acquires a public Canadian target (CanCo) in exchange for Foreign Parent shares, using a Canadian corporation (CanAcquireCo):
- Foreign Parent shares would be prohibited property if more than 10 percent of their post-AOC FMV is attributable to CanCo's property. [fn 63: In ''exchangeable share'' transactions, CanCo shareholders receive exchangeable shares of CanAcquireCo that track the value of, and will ultimately be exchanged for, Foreign Parent shares. In such circumstances, while CanAcquireCo exchangeable shares may be ''specified property'' and thereby excepted from being prohibited property, the ultimate exchange of exchangeable shares for Foreign Parent shares would generally trigger the application of the bump denial rule if those Foreign Parent shares are 10 percent-plus property so as to be prohibited property….]
- Holders of CanCo employee stock options who exchange their options for Foreign Parent stock options will have acquired deemed substituted property (and thus prohibited property) if more than 10 percent of the options' post-AOC FMV is attributable to CanCo's property.
- A Foreign Parent receivable acquired by a lender as part of the AOC series would be a prohibited property if more than 10 percent of its post-AOC FMV is attributable to CanCo's property, unless it was issued solely for money.
- If after the wind-up, Foreign Parent disposes of SubCo 1 (a distributed property) to Buyer, it is important that Buyer not be a prohibited person. Buyer's own securities will also become prohibited property if they derive more than 10 percent of their FMV from the SubCo 1 shares (which are distributed property), creating the need to determine if Buyer's shareholders include former CanCo shareholders (prohibited persons). [fn 64: If Buyer securities are acquired as part of the AOC series by a single pre-AOC CanCo specified shareholder (a prohibited person) or by a number of smaller pre-AOC CanCo shareholders whose collective shareholdings would make a single holder of them a pre-AOC CanCo specified shareholder, the 88(1)(d) bump will be tainted. As described in Section VII.A.2, Buyer will itself be a prohibited person (tainting the bump if the purchase of SubCo 1 is part of the AOC series) if either:
- a single pre-AOC CanCo specified shareholder is also a post-AOC specified shareholder of Buyer (regardless of whether that shareholder acquired its Buyer shares as part of the AOC series); or
- as part of the AOC series, a number of smaller pre-AOC CanCo shareholders whose collective shareholdings would make a single holder of them a pre-AOC CanCo specified shareholder acquire enough Buyer securities to make a single holder of them a specified shareholder of Buyer following the AOC.] This is an important issue since one of the primary uses of the 88(1)(d) bump is on the post-wind-up sale of distributed property to third parties.
Carrie Smit, "Amendments to 'Bump' Rules May Permit Foreign Shares as Deal Consideration", International Tax, No. 68, February 2013, p.1
… where a foreign purchaser ("Forco") sets up a Canadian acquisition corporation ("Bidco") to acquire a Canadian target company ("Canco"), and the consideration to be paid for the Canco shares includes Forco shares, the tax cost bump will not be precluded provided that not more than 10% of the value of the Forco shares is attributable to Canco's property. … From a practical perspective, the Bump Amendment favours larger foreign purchasers (which are substantially more valuable than the Canadian target company) over smaller foreign purchasers.
… It is not entirely clear, however, how the timing in the Bump Amendment is intended to apply. The draft provision refers to property owned at any time after the acquisition of control where more than 10% of the fair market value of that property is, at that time, attributable to the target's property. If the consideration paid for the Canco shares includes Forco shares, and less than 10% of the value of those Forco shares is attributable to Canco's property at the time of the acquisition, does it matter if values fluctuate and, at a later point in time, more than 10% of the value of the Forco shares is attributable to Canco's property? The Bump Amendment does not even appear to have a same series concept in respect of this valuation issue. In order to preclude the bump, the Substituted Property must be acquired as part of the same series of transactions or events that includes the winding-up of Canco (the Forco shares issued as consideration for the Canco shares would clearly satisfy this series requirement where they are the actual deal consideration). The question as to whether the Forco shares constitute Substituted Property is governed by paragraph 88(1)(c.3), which does not include a series concept. It is not known whether post-closing value fluctuations over an unlimited time can determine whether the bump was available on a retroactive basis. In many situations, the bumped property will be transferred out of Canada quickly following the acquisition of control and winding-up (or amalgamation).
Subparagraph 88(1)(c.3)(ii)
Administrative Policy
31 January 2000 External T.I. 1999-001096 -
"Where an earn-out or any similar type of agreement is clearly for the sole purpose of providing a mechanism to determine the fair market value of the shares of the subsidiary (where the fair market value of such shares cannot otherwise be determined), such property would not normally be considered as a property described in either subparagraphs 88(1)(c.3)(i) or (ii) of the Act. This would not be the case where an earn-out is used as a mechanism to distribute additional amounts based on the future sale or value of some particular property."
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(c.3) - Subparagraph 88(1)(c.3)(i) | earn-out | 93 |
3 August 1998 T.I. 9727435
Respecting the acquisition by a public company (Aco) of shares of another public company (Bco) in a reverse takeover, CRA stated that "the shares of Aco would not be considered to be substituted property as substantially all of the value of those shares would not be attributable to property distributed on the winding-up (i.e. property of Bco."
Income Tax Technical News, No. 9, 10 February 1997
The words "wholly or partly attributable to" in subparagraph 88(1)(c.3)(i) are very broad and would apply, for example, to a share or interest in a corporation, partnership or trust which owns or has an interest in the subsidiary's property. However, shares of the parent issued as consideration for the shares of the subsidiary are expressly excluded from the rule.
The words "determinable primarily by reference to" in subparagraph 88(1)(c.3)(ii) are, we understand, intended to have a narrower meaning. As the Explanatory Notes confirm, subparagraph 88(1)(c.3)(ii) would apply to property such as "tracking" shares or debt, the value of which is somehow tied to the value of or proceeds from certain underlying property of the corporation. On the other hand, the provision would not ordinarily apply to conventional common or preferred shares or debt issued by the parent as consideration for the acquisition of the shares of the subsidiary.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Other Legislation/Constitution - Federal - Indian Act - Section 87 | 26 | |
| Tax Topics - Income Tax Act - Section 212 - Subsection 212(1) - Subparagraph 212(1)(b)(vii) | events must be beyond borrower's control | 77 |
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) | loss transfer must be to affiliated person - related not enough | 48 |
| Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c) | 69 | |
| Tax Topics - Income Tax Regulations - Regulation 4900 - Subsection 4900(12) | 69 | |
| Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(e) - Subparagraph 53(1)(e)(i) | avoidance of double taxation through absence of ACB adjustment | 129 |
Articles
Firoz Ahmed, "Substituted Property for Purposes of the Section 88(1)(d) Bump", Canadian Current Tax, Vol. 7, No. 7, April 1997, p. 70
Where a public corporation ("Smallco") makes a successful takeover bid for another corporation ("Bigco"), RC is prepared to rule that shares of Smallco issued to shareholders of Bigco will not be considered to be substituted property by virtue of s. 88(1)(c.3)(ii) if the fair market value of the gross assets of Smallco prior to the completion of the bid is greater than 10%, but less than 50%, of the fair market value of the gross assets of Smallco after the wind-up of Bigco.
Paragraph 88(1)(c.4)
Articles
Angelo Nikolakakis, Alain Léonard, "The Acquisition of Canadian Corporations by Non-Residents: Canadian Income Tax Considerations Affecting Acquisition Strategies and Structure, Financing Issues, and Repatriation of Profits", 2005 Conference Report (Canadian Tax Foundation), 21:1-61, at 21:24-25:
Policy for exclusion of shares or debt of foreign corporations (p. 280)
Why is it that shares of a non-resident Bidder should not constitute "specified property"? The answer to this question too seems to have nothing to do with the treatment of the proceeds of disposition to the Target stakeholders....
What is the problem, then, under paragraph 88(1)(c)? The Department of Finance may be considering whether or not it should be concerned about transactions by which non-Canadian assets are removed from Canadian corporate solution against tax attributes generated by consideration paid in foreign equity instead of cash or Canadian equity. At least with share consideration issued by a Canadian Bidder, the assets remain in Canadian corporate solution. In contrast, where non-Canadian assets are bumped and then distributed to a non-resident Bidder, there is no further Canadian tax claim with respect to these assets.
Subparagraph 88(1)(c.4)(ii)
Articles
Paul Stepak, Eric C. Xiao, "The 88(1)(d) Bump – An Update", 2013 Conference Report (Canadian Tax Foundation), pp.13:1-60
Is debt of Target non-specified property after it is amalgamated with Bidco? (pp. 13:16-19)
On a literal reading of old paragraph 88(1)(c.3), indebtedness of the subsidiary, the parent, and anyone up the chain of ownership is attributable property. Therefore, any loans made to finance the acquisition would constitute substituted property acquired as part of the series. A more technical concern arose with respect to historical debt of the subsidiary in that upon the winding-up or amalgamation, the creditors arguably acquired new property, presumably as part of the series. Therefore, there was a concern that the bump could be denied if lenders to the buyer group or the subsidiary were prohibited persons.
Subparagraph 88(1)(c.4)(ii) was amended to extend to indebtedness issued for consideration that consists solely of money….
Generally, if the borrower is at a level anywhere above Bidco, no further issues should arise provided no reorganization is undertaken that involves the borrower as part of the series. However, if the debt is borrowed by Bidco itself, a technical concern arises on the subsequent amalgamation of Bidco and Target: has the holder of the Bidco debt acquired attributable property that is not specified property-- namely, a debt of Amalco acquired as a result of the amalgamation (rather than debt issued for money)?
[P]aragraph 87(2)(a) deems Amalco to be a new corporation for the purposes of the lTA, and the cost rule in subsection 87(6) appears to presume that there is a disposition by a holder of debt of a predecessor upon an amalgamation. The deemed acquisition of the Amalco debt on the amalgamation does not appear to fit squarely into the definition of specified property because the Amalco debt is not issued as consideration for the acquisition of the Target shares, and it is not clear whether it continues to be issued solely for money. The same issue arises where the existing debt of Target or any vendor-take-back notes issued by Bidco to shareholders of Target become debt of Amalco as a result of the amalgamation.
Does paragraph 88(4)(b) resolve this potential issue?...
The Joint Committee made a submission on this point; however, no changes were made by Finance in response. It stands to reason that Finance believes that no changes are needed…
We also note that CRA has ruled favourably [fn 63: document no. 2006-0205771R3, 2007] in the context of a short-form amalgamation dealing with the Amalco shares. The CRA states that the Bidco shares issued to Target shareholders and which became Amalco shares on the Amalgamation did not constitute substituted property….
[W]e submit that paragraph 88(4)(b), when read in context, should reasonably be considered to have the effect of deeming the securities of Amalco to be the same as the securities of the predecessor corporation….
Alternatively, it may be argued that debt of a predecessor becoming debt of Amalco does not constitute an issuance of the debt. If the original debt was issued only for money, the new debt (representing the same obligation) may be debt acquired for something other than money, but it continues to be debt issued solely for money.
Is debt of Target non-specified property after it is wound-up into Bidco? (p. 13:19)
A similar issue could arise with respect to historic debt of the subsidiary assumed by the parent on the winding-up of the subsidiary. By virtue of paragraph 88(l)(e.2), subsection 87(6) is applicable to the substitution of the parent's obligation for that of the subsidiary. However, the above argument with respect to paragraph 88(4)(b) would not apply to debt of the subsidiary assumed by parent on the winding up because paragraph 88(4)(b) only applies to amalgamations, not windings up….
No safe harbour for subsequent conversion of convertible debt (p. 13:19)
Where the acquisition debt issued is a convertible debt, the subsequent conversion of such debt into shares of the borrower could still cause the application of the bump-denial rule if, at the time of the conversion, the shares derive more than 10 percent of their value from distributed property on the basis that the subsequent conversion is part of the series that includes the winding up of the subsidiary.
Brian R. Carr, Julie A. Colden, "The Bump Denial Rules Revisited", Canadian Tax Journal (2014) 62:1, 273-99.
Dissent payment rights under a plan of arrangemnt as indebtedness (p. 292)
If the plan of arrangement ultimately receives shareholder approval, dissenting shareholders will be entitled to receive fair value for their shares at a later date. The dissent right represents indebtedness the value of which would be attributable to distributed property. If the plan of arrangement provides that the shares held by dissenting shareholders are to be acquired by the acquiror in exchange for payment, such indebtedness will constitute specified property since it will be issued by the parent as consideration for the acquisition of the shares of the subsidiary. In contrast, if the plan of arrangement provides that the shares held by dissenting shareholders are to be cancelled for payment, while such indebtedness will constitute substituted property, it will not be specified property. Thus, in the latter example, the acquisition of such substituted property (being the right of dissenting shareholders to receive fair value for their shares) will have to be taken into account in determining whether prohibited persons have acquired property….
Convertible debt as specified/determinable property (p. 293)
Proposed clause 88(1)(c.4)(ii)(B) provides that indebtedness that was issued for consideration that consists solely of money will be specified property. Thus, acquisition financing, assuming that it is issued solely for money, will constitute specified property. On its face, this proposal includes convertible debt or other participating debt issued solely for money as specified property. However, consideration should be given to whether such debt may constitute determinable property. [described in s.88(1)(c.3)(ii)] In such case, it may be prohibited property.
Paul Stepak, J. Scott Wilkie, "Relieving and Clarifying Changes to Canadian Bump Rules", Corporate Finance, Volume XVIII, No. 3, 2012, p. 2130 at 2132:
- Indebtedness issued for money is specified property – this rule now confirms, from and after 2001, that indebtedness issued solely for consideration consisting of money will not generally cause a bump problem if acquired by restricted persons. This alleviates much of the concern when acquisition financing is provided by a bank (or banking syndicate) and the lender's related entities may have been shareholders of a public Target. This also alleviates concerns regarding the need to obtain historic Target ownership information from bondholders in a public debt offering.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(c.9) | 92 |
Paragraph 88(1)(c.9)
Articles
Paul Stepak, Eric C. Xiao, "The 88(1)(d) Bump – An Update", 2013 Conference Report (Canadian Tax Foundation), pp.13:1-60
Options granted by virtue of employment not part of series (p. 13:29)
[A] stock option granted to an employee by Bidco or Bidco's Canadian parent after closing to acquire shares would not be covered by new paragraph 88(l)(c.9) as such an option is not issued in consideration for the acquisition of options of Target. Presumably, the granting of an employee stock option in the ordinary course would not cause the application of the bump-denial rule, provided that such option is granted by virtue of employment and therefore is not part of the series that includes the winding up of the subsidiary.
Brian R. Carr, Julie A. Colden, "The Bump Denial Rules Revisited", Canadian Tax Journal (2014) 62:1, 273-99.
No relief under s. 88(1)(c.9) for conventional option exchange (pp. 294-5)
Technically, however, the proposed amendment provides no relief if an option exchange is structured in a manner that is typical in the context of an acquisition of a target corporation. If the options in respect of shares of the target are cancelled by the target and, in exchange, options of the acquiror are issued to the former target optionholders, there is no category of specified property that will include such options. The relevant references to "shares" in the definition of specified property in paragraph 88(1)(c.4) specify shares of the parent that are received as consideration for the acquisition of shares of the target, or shares of the parent that are issued for consideration that consists solely of money.69 Neither of these exceptions will be satisfied if a reference to a share in paragraph 88(1)(c.4) includes an option….
…In order to fit within the legislative proposals, the acquirer would have to acquire the existing options and issue new options in exchange therefor….
Paul Stepak, J. Scott Wilkie, "Relieving and Clarifying Changes to Canadian Bump Rules", Corporate Finance, Volume XVIII, No. 3, 2012, p. 2130 at 2132:
- References to a share in the definition of specified property includes a right to acquire a share – this rule now confirms, from and after 2001, that the right to acquire a share is assimilated to a share for purposes of the relieving definition of specified property. This means that certain transactions involving options and warrants (e.g., the issuance by Canco of options in consideration for options or shares of Target, or the acquisition by Canco of Target options in exchange for Canco shares or indebtedness) will not create any additional bump risk.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(c.4) - Subparagraph 88(1)(c.4)(ii) | 85 |
Paragraph 88(1)(d)
Cases
Canada v. Oxford Properties Group Inc., 2018 FCA 30
When Oxford Properties was sold to an OMERS subsidiary, the purchaser first negotiated that Oxford would drop various properties down into LPs on a s. 97(2) rollover basis, with those partnership interests subsequently being bumped under s. 88(1)(d) (which, in 2001, did not prohibit bumping interests in partnerships holding appreciated buildings). After the acquisition, those bumped costs were then pushed down onto the cost of interests in property-specific LPs (which had been formed following the acquisition), by winding-up the upper-tier LPs under s. 98(3) and using the s. 98(3)(c) bump. After the three-year s. 69(11) period, some of the property-specific LPs were then sold to tax exempts.
In connection with the use in the transactions of s. 88(1)(d), Noël CJ stated (at paras 77-78):
The bump provided for in paragraphs 88(1)(c) and (d)…essentially allows any ACB that would otherwise be lost on a vertical amalgamation to be preserved and transferred to different property that is taxed the same way.
Subparagraph 88(1)(c)(iii) prohibits the parent from bumping the cost of “ineligible property” which includes depreciable property. …[D]epreciable property or other types of property that give rise to a 100% rate of inclusion cannot be bumped.
After reversing the findings of D’Arcy J that these transactions did not abuse ss. 97(2) and 100(1), Noël CJ went on to find that the same purposive analysis that was applied in determining that the transactions were abusive insofar as they avoided recognition in taxable hands of recapture should also be applied to determine that GAAR should be applied only to recognize a taxable capital gain (effectively under s. 100(1)) equal to that recapture (of $116M) and not a taxable capital gain equal to the accrued capital gains on the buildings and land of $21M and $11M, respectively. In this regard, he stated (at para. 116):
[F]ailure to recognize a cost that has been actually incurred but which would disappear on a vertical amalgamation or a partnership dissolution goes against the integrity of the capital gains system because it allows for the subsequent realization of a capital gain in circumstances where there has been no economic gain.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) | using the s. 88(1)(d) bump on newly-formed rental property LPs to avoid indirect recapture income under s. 100(1) was abusive | 925 |
| Tax Topics - Income Tax Act - Section 98 - Subsection 98(3) - Paragraph 98(3)(c) | s. 98(3)(c) bump is intended to avoid gain realization where there has been no economic gain | 259 |
| Tax Topics - Income Tax Act - Section 69 - Subsection 69(11) | 3-year time limitation in s. 69(11) did not establish safe harbor for avoidance of recapture on sale after that period | 366 |
| Tax Topics - Income Tax Act - Section 100 - Subsection 100(1) | purpose is to ensure that latent recapture will be recognized on sale to tax exempt | 244 |
| Tax Topics - Income Tax Act - Section 97 - Subsection 97(2) | object includes ultimate taxation of the deferred gain | 224 |
| Tax Topics - Income Tax Act - Section 171 - Subsection 171(1) | GAAR question as to determining a provision’s object was subject to correctness standard | 155 |
| Tax Topics - Statutory Interpretation - Hansard, explanatory notes, etc. | statement that amendment was for “clarification” was self-serving | 199 |
| Tax Topics - Statutory Interpretation - Interpretation Act - Subsection 45(2) | determination of whether amendment merely clarified requires review of pre-amendment state of law | 135 |
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(2) | consequential s. 245(2) adjustment must be scaled to the abuse | 381 |
See Also
Oxford Properties Group Inc. v. The Queen, 2016 TCC 204, rev'd 2018 FCA 30
A corporation (“BPC”), which was mostly owned by a Canadian pension fund (“OMERS”), obtained the agreement of a predecessor of the taxpayer (“OPGI Amalco”) that, prior to BPC’s acquisition of OPGI Amalco, it or an OPGI Amalco subsidiary (“MRC Amalco”) would transfer various of its rental real estate properties (including the “Three Real Estate Properties”) on a s. 97(2) rollover basis to newly formed LPs (the “First Level LPs”). Following the acquisition on October 16, 2001 of OPGI Amalco by a subsidiary of BPC, the cost of the interests in the First Level LPs was bumped under s. 88(1)(d) on an amalgamation which formed the taxpayer. In 2004, the First Level LPs transferred the Three Real Estate Properties to respective newly-formed LPs (the “Second Level LPs”) on a s. 97(2) rollover basis and the First Level LPs were wound–up, thereby permitting the high ACB in their units to be pushed down onto the cost of the interests in the Second Level LPs under s. 98(3)(c). The taxpayer then sold its interests in the Second Level LPs, somewhat after the three-year period referenced in s. 69(11), to entities that were exempt from Part I tax.
In rejecting a Crown position that an “indirect” bumping of the cost of depreciable property frustrated s. 88(1)(d), D’Arcy J stated (at paras 143, 145, 206 and 207):
In the situation where the adjusted cost base of the parent’s shares in the subsidiary arose on an acquisition of the subsidiary’s shares, tax was paid on the appreciation of the value of the shares. However, after this acquisition, the assets of the subsidiary retained their historic tax costs and accrued gains. Therefore there is a potential for double tax when the assets are sold subsequent to the acquisition. This potential double tax always exists whenever shares of a corporation, as opposed to the assets of the corporation, are acquired. It is clear… that Parliament was concerned with the situation where the tax-paid adjusted cost base of the shares in the subsidiary disappeared on a vertical amalgamation, while the accrued gains on the assets of the subsidiary were retained by the amalgamated company.
Practically speaking, the purpose of the bump rules is to provide the parent with an opportunity, on the vertical amalgamation, to push down the adjusted cost base of its shares of the subsidiary to qualifying non-depreciable property owned by the subsidiary at the time the parent last acquired control of the subsidiary. …
…. Section 88, as drafted at the time, did not require the Appellant to look at the nature of the assets of the First Level LPs to determine the amount by which it could bump its interest in the
limited partnerships.Nor, in my view, was it the object of paragraphs 88(1)(c) and (d) to claw back the bump on the basis of the identity of the person who subsequently purchased the bumped asset.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) | no abuse in using 88(1)(d) bump to avoid s. 100 after 3-year s. 69(11) period | 537 |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(10) | subsequent sale part of series as it utilized the benefit of previous LP packaging transactions | 371 |
| Tax Topics - Income Tax Act - Section 97 - Subsection 97(2) | purpose not to tax underlying recapture on subsequent LP unit sale | 415 |
| Tax Topics - Statutory Interpretation - Interpretation Act - Subsection 45(2) | subsequent amendment shed light on scope of previous version | 99 |
| Tax Topics - Income Tax Act - Section 100 - Subsection 100(1) | S. 100 operates only on outside basis gain | 278 |
| Tax Topics - Income Tax Act - Section 69 - Subsection 69(11) | Parliament provided safe harbour for sales after 3 years | 196 |
| Tax Topics - Income Tax Act - Section 98 - Subsection 98(3) - Paragraph 98(3)(c) | purpose: to preserve high outside basis through push down | 285 |
Slate Management Corporation v Canada (Attorney General), 2016 ONSC 4216
A purchaser used a newly-formed AcquisitionCo to acquire a Target, and asked for and received a computation from its accounting firm of the amount by which it would be able to bump the assets of the Target under s. 88(1)(d), as well as receiving a rep from Target that Target would not do anything to jeopardize the bump. It later learned that it had lost the bump by amalgamating the three corporations in only one amalgamation, rather than using two sequential amalgamations.
Hainey J found that the parties had a “a continuing specific intention to achieve the amalgamation in accordance with the tax bump rules,” so that a rectification order was granted to Amalco.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Rectification & Rescission | a generalized intent to achieve a s. 88(1)(d) bump was a sufficient basis to rectify in order to redo an amalgamation | 192 |
Administrative Policy
30 May 2019 Internal T.I. 2019-0806761I7 - Late filing of 88(1)(d) designation
A non-resident corporation formed a Canadian “Acquireco,” which acquired all the shares of a public corporation, and then vertically amalgamated with that target to form the Taxpayer. During the first taxation year following the amalgamation, the Amalco (the Taxpayer) sold all the shares of a U.S. subsidiary (the “U.S. shares”) that had been held by the target to a non-resident affiliate. No s. 88(1)(d) designation was made as an outside appraisal showed no appreciation of the U.S. shares.
CRA issued a proposal letter to substantially increase the proceeds of disposition of the U.S. Shares pursuant to s. 247(2)(c). Upon receipt of the letter, the Taxpayer requested a late-filed designation to increase the cost of the U.S. Shares pursuant to ss. 88(1)(d) and 87(11) for the end of the first taxation year following the amalgamation (“year-end #1”). The proposed reassessment would be made beyond the normal reassessment period but within the extended s. 152(4)(b)(iii period. Folio S4-F7-C1, para. 1.40 indicated that CRA would not allow a late-filed designation in situations where the particular eligible property to be bumped was disposed of in a taxation year that was statute-barred. Did this policy apply here?
After quoting from Nassau Walnut to the effect that where the Minister changes the provision under which the taxpayer’s income is computed and the taxpayer then seeks a deduction under the new provision, that request “does not raise the spectre of retroactive tax planning,” the Directorate then stated that here:
[I]f the CRA has the ability to reassess the Taxpayer’s Part I income tax return for year-end #1 pursuant to subparagraph 152(4)(b)(iii) with respect to its disposition of the … US shares … the Taxpayer’s late-filed designation request could be considered.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 152 - Subsection 152(4) - Paragraph 152(4)(b) - Subparagraph 152(4)(b)(iii) | late designation policy coordinated with extended reassessment period | 216 |
14 March 2016 Internal T.I. 2015-0609671I7 - Earnout, Amalgamation, Cost of Shares and ECE
Pursuant to a share purchase agreement, Acquisitionco (a newly-formed Canadian subsidiary of another corporation) purchased all the outstanding shares of (Canadian-resident) Targetco (the “Shares”) for a base purchase price plus cash earnout payments of up to $XX (the “Earnout Payments”) upon achieving specified milestones. Immediately thereafter, there was a short-form amalgamation of Acquisitionco and Targetco to form Amalco (the “Amalgamation”). Amalco thereafter paid the Earnout Payments to the former Targetco Shareholders upon achieving the milestones. Amalco reported the Earnout Payments as eligible capital expenditures (“ECE”) and claimed s. 20(1)(b) deductions for the two taxation years in issue. Was this treatment correct?
In finding that the Earnout Payments were an addition to the cost of the Shares rather than being ECE, the Directorate stated:
[R]egardless of whether the Shares existed at the time that the Earnout Payments became payable or paid, the Earnout Payments nevertheless are part of the cost of the Shares. Mandel…appears to dictate such a result… .
… The difference between cost of the Shares of $XX and $XX immediately before the Amalgamation is only relevant in regards to bump room for the assets of Targetco, if a bump was available under paragraphs 87(11)(b) and 88(1)(c). We were not provided with information regarding whether a bump was implemented upon the Amalgamation, but we note that a bump can only be made on capital property and eligible capital property is not an eligible property for bump purposes. …
[T]he Amalgamation should not entitle Amalco to re-characterize an amount that is cost of the Shares simply because the Earnout Payments were made at a point in time where the Shares no longer exist. Allowing such a re-characterization of cost of non-depreciable property to ECE would in effect allow a bump on eligible capital property. Such a result is offensive… .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 14 - Subsection 14(5) - Eligible Capital Expenditure | payments made by Amalco in satisfaction of earnout obligation for acquisition of one precedessor by the other were not ECE | 204 |
| Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base | earnout payments an addition to cost of shares which had since disappeared | 78 |
| Tax Topics - General Concepts - Purpose/Intention | attribution of predecessor's intention to Amalco | 132 |
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(i) | position on interest deductibility following target amalgamation is based on policy and ITA scheme rather than technical | 338 |
30 March 2016 External T.I. 2016-0629701E5 F - bump-up 88(1)(d)
Mr. A holds all the shares of Corporation A, whose only property which is capital property with an ACB of $100,000. Corporation B, which is an unrelated corporation carrying on a land development business, acquires all the shares of Corporation A for $500,000 in order to subdivide the property for resale. If Corporation A is wound up immediately, can the cost of land be increased under s. 88(1)(d) to $500,000? What if the winding-up of Corporation A was effected a several years later? CRA responded (TI translation):
[T]o the extent that the land held by Corporation A was capital property, other than an ineligible property, to it at the time that Corporation B last acquired control of it, and the land was owned by Corporation A until it was distributed to Corporation B on the winding-up, the land of Corporation A would be a property whose cost could be increased by the amount determined by paragraph 88(1)(d), notwithstanding that the property in question would not be a capital property to Corporation B, and assuming that subparagraphs 88(1)(c) (iv) to (vi) did not apply in this case.
Whether the winding-up of Corporation B takes place immediately after the acquisition of control or several years after the acquisition of control, the land will represent an eligible property for bump purposes but subject to the limitations in [ss. 88(1)(d)(i), (i.1) and (iii), and (ii)]. The amounts determined by virtue of these limitations will thus vary depending on when the winding-up occurs.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Real Estate | land developer accesses capital property status of land held in acquired subsidiary | 62 |
S4-F7-C1 - Amalgamations of Canadian Corporations
1.39 …[T]he designation of any bump amount must normally be made in the new corporation's Part I income tax return for its first tax year. However, subject to the conditions described [below], the CRA will generally accept a late-filed designation where the corporation formed on an amalgamation described in subsection 87(11):
(a) agrees to make a proportional designation of the bump amount among all properties that are not ineligible properties based on the maximum amount that is allowed under subparagraph 88(1)(d)(ii); or
(b) accepts that the CRA determines, in its discretion, what portion of the bump amount will be added to the cost of any property
21 November 2011 External T.I. 2011-0416881E5 F - Late-filed designation - paragraph 88(1)(d)
CRA generally allows a late-filed designation under s. 88(1)(d) to the extent that (1) the parent corporation agrees to allocate the excess calculated under s. 88(1)(d) proportionately among the capital properties eligible for the bump on the basis of the limit available under s. 88(1)(d)(ii); or (2) the parent accepts that CRA will determine, at its discretion, to which property the excess amount should be allocated. CRA will not accept a late-filed designation where (1) there is retroactive tax planning; (2) the designation is part of a tax avoidance scheme; or (3) it is necessary to issue a reassessment for a statute-barred year to effect the designation (being generally the year in which the properties were disposed of.)
19 May 2011 IFA Roundtable, 2011-0404521C6 - calculation of tax-free surplus balance
In the situation where the Canadian target is wound up within a reasonable period of time of its acquisition by the acquisition company and the shares of the "bumped" FA are distributed by the acquisitionco to its foreign parent before any dividends are received or deemed to be received by the Canadian target or the acquisitionco, the surplus balances of FA will be irrelevant. Accordingly, in these circumstances, CRA will not challenge the bump by raising the absence of a calculation of the TFSB balances of FA.
2006 Ruling 2006-0178571R3 - Purchase of Target and Bump
Bump ruling provided respecting transactions which apparently involved the transfer of assets on a rollover basis by the target (Mergeco), with the cost of the partnership units being bumped after the acquisition of Mergeco by Bidco, with the proviso that the ruling did not apply if the bumped LP units were disposed of to an exempt person or a mutual fund trust.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 87 - Subsection 87(1) | amalgamation with parent as survivor (forward triangular "D" merger) | 506 |
23 October 1995 T.I. 951342
Where Acquisitionco, subsequent to its acquisition of Targetco and prior to the winding-up of Targetco and its child and grandchild subsidiaries (Subco 1 and Subco 2), transfers its shares of Targetco to a newly-incorporated subsidiary of Acquisitionco ("Newco"), s. 88(1)(d)(i.1) will apply to reduce the s. 88(1)(d) bump available to Newco by the amount of taxable dividends paid by Subco 2 to Subco 1 and by Subco 1 to Targetco prior to the acquisition of the shares of Targetco by Acquisitionco. In this situation, s. 88(1)(d.2) does not deem Newco to have acquired the shares of Targetco and, therefore, the postamble deeming provision of s. 88(1)(d) will apply to Newco.
1994 A.P.F.F. Round Table, Q. 14
Section 8 of Supplement 12 IC88-2 (respecting the incorporation by Target Corporation of its three businesses prior to the purchaser of Target winding up Target and selling off two of the incorporated businesses after utilizing the s. 88(1)(d) bump) continues to reflect the Department's position, although this obviously assumes that the series of transactions were not structured for the expressed purpose of avoiding the new rules in s. 88(1)(d).
10 February 1993 T.I. (Tax Window, No. 28, p. 12, ¶2405)
No late election can be made under s. 88(1)(d).
26 August 1992, T.I. (Tax Window, No. 23, p. 13, ¶2168)
S.88(1)(d) merely requires that a property be a capital property to the subsidiary at the time the parent last acquired control of the subsidiary and that the property be owned by the subsidiary continuously from that time until the distribution of the property on the winding-up; there is no requirement that the property be a capital property to the subsidiary continuously from the time of acquisition of control until the time of distribution.
21 May 1991 T.I. (Tax Window, No. 3, p. 9, ¶1260)
The parenthetical words ("other than a corporation acquired by [the parent] from a person with whom it was dealing at arm's length") at the end of s. 88(1)(d) also excludes corporations whose shares were not directly acquired by the parent but which were direct or indirect subsidiaries of a corporation whose shares it acquired from an arm's length vendor. Accordingly, the "bump" will not be reduced by the amount of dividends paid by those direct or indirect subsidiaries prior to the acquisition of their control.
Articles
K.A. Siobhan Monaghan, "Safe Income and the Elusive Subsection 88(1) 'Bump' - and other Problems in a Series", Corporate Structures and Groups, Vol. V, No. 3, 1999, p. 274.
Mark D. Brender, "Interaction of the Mark-to-Market Rules with Step-Up Transactions", Corporate Structures and Groups, Vol. V, No. 2, 1998, p. 256.
M. Ton-That, "Changes to the 'Bump' Rules: Transactions Where It Can Now Be Denied", Corporate Structures and Groups, Vol. V, No. 1, 1998, p. 244.
Subparagraph 88(1)(d)(i)
Administrative Policy
28 January 2016 External T.I. 2015-0617771E5 F - Bump calculation
Is the balance of the “future income tax liabilities” (being an accounting provision which was not deducted in computing income) presented in the financial statements of the subsidiary immediately before the winding-up required to be included in either of clause (B) or (C) in s. 88(1)(d)(i)? CRA responded (TaxInterpretations translation):
Respecting clause (C) of subparagraph 88(1)(d)(i), as it only applies to reserves deducted in computing the subsidiary’s income for its taxation year during which its assets were distributed to the parent on the winding-up, the balance of the “future income tax liabilities” would not be included in this clause.
Clause (B) of subparagraph 88(1)(d)(i) applies to amounts each of which is the amount of any debt owing by the subsidiary, or of any other obligation of the subsidiary to pay any amount, that was outstanding immediately before the winding-up. The [CRA] position…is to consider an amount as a debt or other obligation of the subsidiary to pay an amount which is outstanding only to the extent that the amount represents a legal obligation to pay an amount. Given that this would not be the case for an amount of “future income tax liabilities” immediately before the winding-up, such an amount could not be included in such clause.
Subparagraph 88(1)(d)(ii)
Administrative Policy
23 April 2013 External T.I. 2012-0461741E5 - Calculation of bump limit under 88(1)(d)
At the date of acquisition of control of the subsidiary by the parent, it owns 3,000 shares of a public corporation with a cost of $10,000 (for an average of $3.33 per share). Subsequently, but before the subsidiary is wound-up, parent acquires 1,000 additional shares at a cost of $5,000, thereby increasing the average cost of 3,000 shares to $3.75 per share.
Under proposed s. 88(1)(d)(ii), the bump limit would be equal to $1.25 per share, i.e., the excess of the $5.00 fair market value of a share at the time of the acquisition of control over the greater of the cost amount at that time ($3.33) and at the time immediately before the winding-up ($3.75). CRA noted that:
Although the purpose of the amendments to subparagraph 88(1)(d)(ii) is to counter transactions in which the amount of the bump available is increased by reducing the cost amount of the subsidiary's property after the acquisition of control of the subsidiary and before its winding-up, the amount of the bump available is also affected in a situation where the cost amount of the subsidiary's property after the acquisition of control of the subsidiary increased.
Respecting the situation where the fair market value of the shares held by the target subsidiary decreases between the times of acquisition of control and wind-up, CRA stated
We agree that the bumped-up cost of the eligible property…can be made up to the fair market value of the property at the time the parent last acquired control of the subsidiary, even where the fair market value of the property has decreased after such acquisition of control.
Articles
Steve Suarez, "Canada's 88(1)(d) Tax Cost Bump: A Guide for Foreign Purchasers", Tax Notes International, December 9, 2013, p. 935
Buy, bump and sell transactions of foreign acquirer (p. 937)
The introduction of the foreign affiliate dumping (FAD) rules in 2012 makes the 88(1)(d) bump more important than ever to foreign purchasers. The FAD rules create significant adverse (and ongoing) Canadian tax consequences for foreign-controlled Canadian corporations with foreign subsidiaries, and they effectively encourage Canadian group members to dispose of existing foreign affiliates whenever possible. Amendments made to the version of the FAD rules enacted in late 2012 facilitate the use of the 88(1)(d) bump in these circumstances, and when the 88(1)(d) bump is available to reduce or eliminate Canadian CGT [capital gains tax] on shares of foreign affiliates (and there are no tax impediments in the foreign affiliate's home country), it will generally be the primary tool used by foreign purchasers of a Canadian corporation that owns foreign subsidiaries to avoid having to contend with the FAD rules on an ongoing basis.
General summary of surplus carve-out rule (p. 945)
…When control is acquired of a Canadian corporation that owns shares of a foreign affiliate, Canadian tax authorities perceive it as being duplicative to allow (in very general terms) the sum of the tax cost of the Canadian corporation's shares of the foreign affiliate and the amount of this ''good'' surplus the Canadian corporation has in the foreign affiliate to exceed the FMV of the Canadian corporation's shares of the foreign affiliate.
Accordingly, when the subsidiary owns shares of a foreign affiliate, an 88(1)(d) bump is not permitted to result in the sum of (1) the parent's tax cost of those shares and (2) the good surplus of the foreign affiliate at the time of the AOC [acquisition of control] exceeding the FMV of those shares. A comparable rule applies when the subsidiary owns shares of a foreign affiliate through a partnership….
Subparagraph 88(1)(d)(ii.1)
Articles
Steve Suarez, "Canada's 88(1)(d) Tax Cost Bump: A Guide for Foreign Purchasers", Tax Notes International, December 9, 2013, p. 935
Summary of s. 88(1)(d)(ii.1)
… Expressed conceptually, the FMV of the partnership interest is deemed to be reduced by an amount representing that portion of the subsidiary's accrued gain on the partnership interest that is attributable to the sum of:
- the FMV of Canadian or foreign resource property owned by the partnership (directly or through other partnerships); and
- the difference between the FMV and cost amount of other forms of non-eligible property (for example, depreciable property or inventory) owned by the partnership, either directly or through other partnerships. [fn 29: The Department of Finance explanatory notes accompanying the relevant provisions of the ITA make clear that this rule does not reduce the amount of an 88(1)(d) bump regarding an interest in a partnership that owns shares of a corporation simply because the corporation owns non-eligible property.]
Example: bump reduction for ineligible appreciation (p. 944)
For example, consider the case of a partnership interest held by the subsidiary at a tax cost of $70 and whose FMV is $100 (that is, a $30 accrued gain). If the partnership itself owns an eligible property with a tax cost of $5 and an FMV of $10, and a non-eligible property with a cost amount of $65 and an FMV of $90, for purposes of the general limitation in Section VI.A.1 above, the FMV of the partnership interest would be deemed to be $75 instead of $100. [fn 30: The reduction in the FMV of the partnership interest is computed as the portion of the accrued gain on that property that is attributable to the notional gains on non-eligible property. Since the notional gains on the non-eligible property represent five-sixths ($25 / ($5 + $25)) of the total accrued gain ($30), for this purpose the FMV of the partnership interest ($100) is reduced by $25 (five-sixths of the $30 accrued gain on the partnership interest)] This means that the maximum s. 88(1)(d) bump on such partnership interest would be $5 ($75-$70).
Paragraph 88(1)(d.2)
Administrative Policy
31 October 2011 External T.I. 2011-0422981E5 F - Whether property is eligible for a bump
In 2000, an individual ("Parent") subscribed cash for common shares on the incorporation of "Parentco", with Parentco purchasing marketable securities a few months (or a few hours) later. In 2010, Parent sold his shares of Parentco to his child for FMV cash consideration (thereby realizing gain at which time the marketable securities were the only assets of Parentco.) The child shortly thereafter transferred the shares of Parentco to a newly incorporated corporation ("Childco") in consideration for a demand promissory note, and wound-up Parentco.
In finding that the bump was not available because the marketable securities were deemed under s. 88(1)(d.2) not to be owned by Parentco at the time of its acquisition of control by Childco (as required in the midamble of s. 88(1)(c)), CRA stated (TaxInterpretations translation):
Childco acquired the control of Parentco from the child, who was not dealing at arm's length with it. Furthermore, the child acquired the control of Parentco from Parent with whom the child was not dealing at arm's length. Consequently ... the time that Childco last acquired the control of Parentco was deemed [by s. 88(1)(d.2)] to be the time when Parent acquired the control of Parentco.
The time when Parent acquired control of Parentco could be ...the time of the incorporation of Parentco, if Parent was the incorporator. The incorporator of a new corporation generally acquires its control at the moment of its incorporation if no share is issued at that time. ...
[T]he marketable securities which were acquired several months later would not be eligible for the bump of 88(1)(d) given that they did not belong to Parentco at the time of the acquisition of control of Parentco by Parent (being when Parentco was incorporated if Parent was the incorporator or otherwise when the first issuance of shares occurred in ... 2000).
The response…would not be different…if the marketable securities were [instead] acquired several hours after the time when the control of Parentco was acquired by Parent as the marketable securities could not belong to the subsidiary at the time of its incorporation.
The analysis did not change if shares were issued by Parentco not only to Parent but also to a minority third party.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(c) - Subparagraph 88(1)(c)(v) | properties not bumpable as the subsidiary control was deemed by s. 88(1)(d.2) to be acquired at the same time as it acquired the properties | 592 |
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(c) - Subparagraph 88(1)(c)(vi) | bump unavailable given previous non-arm's length acquisition | 149 |
17 July 1995 T.I. 950509 (C.T.O. "Meaning of 'Because of a Bequest or Inheritance'")
Where the shares of a Canadian corporation are held by the estate of the deceased shareholder until probate, then distributed to the beneficiary, who then transfers the shares to a holding company which then winds up the Canadian corporation, the acquisition of the shares of the Canadian corporation by the beneficiary from the estate will be considered to be an acquisition "because of a bequest or inheritance". Accordingly, the deemed acquisition of control of the Canadian corporation by the holding company will not precede the date upon which the estate acquired the shares in the Canadian corporation from the deceased individual, and the holding company will be able to make a designation under s. 88(1)(d) in respect of non-depreciable capital property.
Paragraph 88(1)(d.3)
Articles
Brian Nichols, "Post-Mortem Tax Planning Using Paragraph 88(1)(d) Bumps", Tax Topics, No. 1609, 9 January 2003, p. 1.
In order to take advantage of the "reset" effect of paragraph 88(1)(d.3), care must be taken to ensure that a child does not obtain de jure control of Subsidiary before the death of the child's parent. For example, if as a result of an estate freeze of Subsidiary, the child obtains all of the voting shares of Subsidiary, the child obtains de jure control of Subsidiary at that time.
Rhonda Rudick, "Bump Denial Rules: Time of Acquisition of Control in the Context of Post-Mortem Estate Planning", Corporate Structures and Groups (Federated Press), Vol. VII, No. 1, 2001, p. 355.
Son already had s. 186(2) control of Opco
[A]n individual (father) dies on October 1, 2001 and leaves all of his assets to his son, who is also named sole executor of the estate. Included in the assets of the estate are all of the preferred shares of Opco, which shares carry with them sufficient votes to control Opco. The son holds common shares of Opco. Opco owns land and marketable securities. In order to take advantage of the bump rules, the son rolls his shares of Opco to Holdco, a newly incorporated corporation. Opco is then wound up into Holdco, and a designation is made under paragraph 88(1)(d)…
[S]ince the son does not deal at arm's length with his father, the son did not last acquire control of Opco from the father, for the purpose of subsection 186(2), at the time of the father's death, as the son would be viewed as having controlled Opco while his father controlled Opco….
Does s. 88(1)(d.) apply for purposes of the s. 186(2) control test?
It is not clear from the wording of paragraphs 88(1)(d.2) and (d.3) whether the deeming rule in paragraph 88(1)(d.3) changes this result. In particular, it is not clear whether paragraph 88(1)(d.3) applies for purposes of the control test in subsection 186(2), as paragraph 88(1)(d.3) only applies for purposes of paragraphs 88(1)(c), (d) and (d.2). In addition, paragraph 88(1)(d.3) does not clearly deem the father and his son to deal with each other at arm's length, as is required by subsection 186(2), but merely deems the acquisition of control of Opco by the son to be an arm's length acquisition. This is in contrast to the previous version of paragraph 88(1)(d.2), which deemed a person who acquired control from the deceased because of a bequest or an inheritance to have dealt at arm's length with the deceased for purposes of such paragraph and for purposes of subsection 186(2)….
Paragraph 88(1)(e)
Articles
Kevin Yip, "Recent Legislation Affecting Partnerships and Foreign Affiliates – Subsection 88(1) and Section 100", Canadian Tax Journal, (2013) 61:1, 229-256, at 245
After noting that s. 88(1)(e) can apply even if no ineligible property was transferred on a rollover basis, as s. 88(1)(e)(ii) only requires that the partnership hold ineligible property (whether directly or indirectly) at the time of acquisition of control of the subsidiary, he stated:
Finance emphasizes the anti-avoidance nature of paragraph 88(1)(e), and states that this provision is intended to apply in circumstances where the "transfers are made to change the factors that may be relevant when applying the formula in subparagraph 88(1)(d(ii.1)" [fn. 49: (October 14, 2012 explanatory notes, at 27.] However, there is no requirement in paragraph 88(1)(e) indicating that the rule will apply only where there is an anti-avoidance purpose or where there would be a difference in the amount determined under subparagraph 88(1)(d)(ii.1). Thus, this new provision appears to apply whether or not a series of transactions that included a subsection 97(2) or section 85 rollover was actually intended to affect the bump amount.
Paragraph 88(1)(e.2)
Administrative Policy
S3-F3-C1 - Replacement Property
Preservation of ss. 13 and 44 replacement property rollover
1.50 Similarly, paragraph 88(1)(e.2) prevents the loss of a section 13 or section 44 deferral in a winding-up to which subsection 88(1) applies. …
1.51 While paragraphs 87(2)(l.3) and 88(1)(e.2) prevent the deferral from being lost, it may not be reasonable to conclude that the property was acquired to replace a former property. Each situation must be considered on its facts to make this determination.
1996 Ruling 961198
Favourable ruling that the exemption in s. 212(1)(b)(vii) continued following a wind-up of the debtor corporation under s. 88(1).
Paragraph 88(1)(e.3)
Administrative Policy
2018 Ruling 2017-0711071R3 - Use of subsidiary losses & ITCs after wind-up
A foreign-owned Canadian-resident corporation (“Taxpayer”) used a subsidiary LP to acquire the sole business of a “Lossco” that was in CCAA proceedings and then, a number of years later (and perhaps well after the completion of the CCAA restructuring) it purchases the shares of Lossco for nominal consideration and winds up Lossco. Lossco had generated non-capital losses and investment tax credits from its business before the sale of that business by the CCAA monitor to the subsidiary LP of Taxpayer.
CRA ruled that (i) proceeding in this two-step manner, and (ii) the absence of any activity or assets in Lossco for a number of years following its sale of its business and prior to its acquisition by Taxpayer, did not preclude Taxpayer from utilizing Lossco's non-capital losses and ITCs in sheltering income allocated to it by the subsidiary LP and by other subsidiary LPs carrying on similar businesses.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1.1) - Paragraph 88(1.1)(b) | streamed losses of empty-shell Lossco flowed through on its dissolution as Lossco LP business had been acquired years earlier through sub LP | 320 |
Subsection 88(1.1) - Non-capital losses, etc., of subsidiary
See Also
S.T.B. Holdings Ltd. v. The Queen, 2011 DTC 1118 [at 650], 2011 TCC 144, aff'd 2002 DTC 7450, 2002 FCA 386
The taxpayer purchased the shares of an unrelated corporation ("Newport") with substantial non-capital losses and wound up Newport into itself, thereby acquiring Newport's land inventory. The Minister's denial of the utilization by the taxpayer of these non-capital losses was based principally on the proposition that Newport carried on a land speculation business directly, which was different from the development business which the taxpayer carried on through limited partnerships.
Rip C.J. found that it was not relevant that the taxpayer carried on its business principally through partnerships, given that the taxpayer, as partner, carried on the partnerships' businesses (paras. 47-50). Rip C.J. also noted (at para. 58) that "land speculation and land development are not carried on in watertight compartments;" and that as the business of the taxpayer entailed acquiring real estate for resale or development, whichever approach would most likely produce a profit, the activities of Newport "were not dissimilar from that of STB" (para. 60). Accordingly, the non-capital losses of Newport could be utilized by the taxpayer under s. 88(1.1) without limitation by s. 88(1.1)(e).
Administrative Policy
2017 Ruling 2017-0711911R3 - loss consolidation ruling
A parent company (Aco), whose only source of taxable income was foreign accrual property income from a non-resident subsidiary but which had losses because of issuing debt to the public, received rulings for the transfer of its losses to a domestic Profitco (held through an intermediate Holdco). This was to be accomplished by Holdco incorporating a new corporation (Lossco1), which would generate losses through triangular transactions between Aco, it, and a Newco incorporated by Aco, with Lossco1 (once it had generated those losses) being transferred on a s. 85(1) rollover basis to Profitco, and wound-up into Profitco on a s. 88(1) rollover basis.
In connection with the s. 88(1) winding-up, the Ruling Letter stated:
Lossco1 will be formally dissolved before the end of the first taxation year of Profitco commencing after the commencement of the winding-up of Lossco1. Lossco1 will file articles of dissolution with the appropriate corporate registry within a reasonable time after the winding-up resolution is passed.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 111 - Subsection 111(1) - Paragraph 111(1)(a) | transfer of losses from parent with losses after FAPI to successive new losscos, which then are wound-up into profitco | 352 |
17 February 2016 External T.I. 2015-0618211E5 - Subsections 88(1.1) and 88(1.2)
Can losses be used by a parent corporation in the year commencing after the commencement of the winding-up of its subsidiary, where the legal dissolution of the subsidiary takes place in that same year? CRA responded:
[T]he subsidiary corporation has been legally dissolved in the year that the parent seeks to deduct its subsidiary’s losses [and]...therefore it has been wound up… . Consequently, the losses of the subsidiary may be deducted by the parent in the year commencing after the commencement of the winding-up of the subsidiary, provided the other conditions of those subsections have been met. ...
[Consider] the following example… .
A wholly-owned subsidiary has losses for its taxation years ending on June 30, 2013 and June 30, 2014. Its parent, which has a December 31 year end, seeks to deduct those losses as soon as possible. The subsidiary commenced its winding-up on June 15, 2014, and it formally dissolved on October 22, 2015. The parent may deduct the subsidiary’s June 30, 2013 and June 30, 2014 losses in its December 31, 2015 year end, which is the same year in which the dissolution of the subsidiary occurred.
S4-F7-C1 - Amalgamations of Canadian Corporations
1.54 Where a predecessor corporation's losses have been carried forward to the new corporation under the provisions of subsection 87(2.1), it is the CRA's view that these provisions or the provisions of subsections 88(1.1), ( 1.2) or (1.3) can be applied to such losses in the event that the new corporation subsequently amalgamates pursuant to section 87 or is wound-up pursuant to subsection 88(1). ...
2014 Ruling 2013-0511991R3 - Loss consolidation
Lossco, which is a specified financial institution with non-capital losses, is a subsidiary of non-resident parent, and serves as the holding company for Opco. After effecting triangular loss-shifiting trnasactions to transfer its non-capital losses to a newco subsidiary (Aco), Lossco will transfer all its ACo shares to the subsidiary profitco (Opco) in exchange for Opco common shares, electing under s. 85(1), and Aco will be wound-up into Opco, with articles of dissolution being filed "within a reasonable time after the winding-up resolution is passed."
Rulings: Including that s. "88(1.1) will apply after the winding up of ACo into Opco... .[and] [f]or this purpose, ACo will not be considered to have been wound up until it has been formally dissolved.
See detailed summary under s. 111(1)(a).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 111 - Subsection 111(1) - Paragraph 111(1)(a) | losses transferred to Newco which is wound-up into profitco, s. 88(1.1) loss transfer not effective until articles of dissolution, provincial GAAR ruling, cashless un-wind | 366 |
2013 Ruling 2013-0496351R3 - Loss Consolidation
Opco, which has non-capital losses, wishes to transfer its non-capital losses to Profitco, a sister. Accordingly, Opco will effectively transfer its losses to a newco (a.k.a. Lossco) and then sell Lossco to Profitco, with the newly-generated Lossco losses being transferred to Profitco on a s. 88(1.1) winding-up.
Ruling
re application of s. 88(1.1) to Lossco winding-up. "For this purpose, Lossco will not be considered to have been wound up until after it has been formally dissolved."
See summary under s. 111(1)(a).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 111 - Subsection 111(1) - Paragraph 111(1)(a) | value of losses transferred to new Lossco reflected in Lossco sale price | 484 |
5 October 2012 APFF Roundtable, 2012-0454061C6 F - Transfer of a Lossco to a related corporation
Example 1
Son claims an ABIL under s. 50(1) with respect to his share investment in a wholly-owned corporation (Lossco), which had ceased active business operations in the year, and then transfers his shares of Lossco at the beginning of the following year to a corporation wholly-owned by his Father (Profitco) for consideration of $1, with Lossco then being liquidated into Profitco under s. 88(1).
Example 2
Brothers A and B each hold 50% of the common shares of Lossco, which had ceased active business operations in the year, with Brother B claiming an ABIL under s. 50(1). Brother B then transfers his shares of Lossco at the beginning of the following year to a corporation wholly-owned by Brother A (Profitco), Brother A sells his shares of Lossco to Profitco for their fair market value, and Lossco is liquidated into Profitco under s. 88(1).
CRA indicated that both examples represented transactions of a different type than loss consolidation transactions described in 2009-0332571R3. However, as in these two examples, there was not an acquisition of control of the Losscos by virtue of s. 256(7)(a)(i), "it appears that the restrictions provided for in paragraphs 88(1.1)(e) and 88(1.2)(c) respecting the utilization of losses other than capital losses and net capital losses would not be applicable." (TaxInterpretations translation)
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Fair Market Value - Shares | non-capital losses of corporation taken into account in valuing its shares | 152 |
| Tax Topics - Income Tax Act - Section 111 - Subsection 111(1) - Paragraph 111(1)(a) | related but not affiliated transfer of Lossco shares to father's or brother's company | 209 |
| Tax Topics - Income Tax Act - Section 50 - Subsection 50(1) | lossco with no assets or liabilities cannot be insolvent | 357 |
30 May 2012 External T.I. 2012-0447961E5 - Winding-up-Carryover of Non-Capital Losses
Parentco winds up its wholly-owned subsidiary (Subco) on May 1, 2012, with the certificate of dissolution of Subco being issued on October 31, 2012. Parentco and Subco both have calendar years, but the dissolution of Subco causes its 2012 taxation year (in which it realizes a non-capital loss of $100,000) to end on October 31, 2012 (the "2012 Loss").
For the purpose of computing the taxable income of Parentco under Part I for any taxation year commencing after the commencement of the winding-up, Subco's 2012 Loss would be deemed, pursuant to paragraph 88(1.1)(c), to be Parentco's non-capital loss for its 2012 taxation year (the taxation year of the parent in which the subsidiary's loss year ended). Thus, pursuant to subsection 88(1.1) and paragraph 111(1)(a), Parentco would be entitled to deduct the 2012 Loss in its taxation year beginning January 1st, 2013 and ending December 31, 2013 (i.e. the taxation year commencing after the commencement of the winding-up).
....the election in paragraph 88(1.1)(f) would not be available for Parentco as no portion of a loss of the subsidiary would be deemed by paragraph 88(1.1)(c) to be a loss of the parent for a "particular taxation year" beginning after the commencement of the winding-up....the "particular taxation year" would begin on January 1st, 2013 and the non-capital loss of Subco would be deemed to be a loss of Parentco for its 2012 taxation year, not its 2013 taxation year.
If the facts are the same as above except that Subco is not dissolved until March 31, 2013 and, in addition to the 2012 Loss, Subco realizes a non-capital loss of $30,000 for its taxation year ending on March 31, 2013 (the "2013 Loss"):
Subco's 2012 Loss would be deemed, pursuant to paragraph 88(1.1)(c), to be Parentco's non-capital loss for its 2012 taxation year (the taxation year of the parent in which the subsidiary's loss year ended)....[P]ursuant to subsection 88(1.1) and paragraph 111(1)(a), Parentco would be entitled to deduct the 2012 Loss in its taxation year beginning January 1st, 2013 and ending December 31, 2013 (i.e. the taxation year commencing after the commencement of the winding-up).
...[T]he election in paragraph 88(1.1)(f) would not be available for Parentco with respect to the 2012 Loss as no portion of such loss would be deemed by paragraph 88(1.1)(c) to be a loss of the parent for a particular taxation year beginning after the commencement of the winding-up.
For the purpose of computing the taxable income of Parentco under Part I for any taxation year commencing after the commencement of the winding-up, Subco's 2013 Loss would be deemed, pursuant to paragraph 88(1.1)(c), to be Parentco's non-capital loss for its 2013 taxation year (the taxation year of the parent in which the subsidiary's loss year ended). Thus, but for paragraph 88(1.1)(f) and pursuant to subsection 88(1.1) and paragraph 111(1)(a), Parentco would be entitled to deduct the 2013 Loss in its taxation year beginning January 1st, 2014 and ending December 31, 2014.
It should be noted that paragraph 111(1)(a) does not permit a deduction of a non-capital loss in the year in which it is incurred.
However, where under paragraph 88(1.1)(c), a subsidiary's non-capital loss is deemed to be a non-capital loss of the parent for a particular taxation year of the parent beginning after the commencement of the winding-up (the 2013 taxation year), the parent may elect under paragraph 88(1.1)(f) to treat the particular loss as having arisen in its preceding taxation year (the 2012 taxation year). If this election is made, Parentco would be entitled to deduct the 2013 Loss in its taxation year ending December 31, 2013 pursuant to paragraph 111(1)(a).
19 March 2001 Internal T.I. 2001-006710 -
The policy of the CCRA that a corporation is considered to have been wound up when there is substantial evidence that it will be dissolved within a short period of time "has not been extended to subsection 88(1.1) ... and therefore, for purposes of subsection 88(1.1), a corporation will not be considered wound up until it has been formally dissolved. However, once the provisions of subsection 88(1.1) of the Act become applicable, non-capital losses are available in any taxation year beginning after the commencement of the winding-up. Where the formal dissolution occurs after the previous year's tax return has been filed, an amended return can be prepared".
1996 A.P.F.F. Round Table No. 7M12910 (Item 4.1.3.2)
Where the acquisition of control of a corporation that holds land as an adventure in the nature of trade results in the realization of a non-capital loss pursuant to s. 10(10), that loss may not be available to the parent following a winding-up because the requirement that the business be carried on by the parent corporation may not be met, depending on the circumstances.
22 November 1996 T.I. 962884 (C.T.O. "Revival of a Dissolved Corporation - Impact on Losses")
Because a revival under s. 241(5) of the Business Corporations Act (Ontario) has retroactive effect, the non-capital losses will be restored upon revival, and the dissolution and subsequent revival will have no effect on the taxation years of the corporation.
31 October 1994 T.I. 942059 (C.T.O. "Non-Capital Losses")
Where two wholly-owned subsidiaries are amalgamated with each other and then wound-up into the parent, the non-capital losses of the subsidiaries will become non-capital losses of the amalgamated corporation, and the non-capital losses of the amalgamated corporation will be deemed to be non-capital losses of the parent.
Halifax Round Table, February 1994, Q. 2
If the parent commences to carry on the business of the subsidiary, and the subsidiary ceases to carry on that business, prior to the time that the parent acquired control of the subsidiary, this by itself will not prevent a flow-through of related non-capital losses under s. 88(1.1).
92 C.R. - Q.18
RC implicitly assumed that s. 88(1.1) was available where the subsidiary had abandoned its business, and used all remaining assets to pay down debts, prior to its winding-up.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) | 27 | |
| Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) | 27 |
30 July 1992 T.I. 921653 (March 1993 Access Letter, p. 72, ¶C82-110)
The application of s. 80 to the parent in its second taxation year ending after the commencement of the winding-up will reduce the non-capital losses of the subsidiary for the previous year that are deemed to be non-capital losses of the parent pursuant to s. 88(1.1) and that otherwise would be available for carry-forward at the end of the first taxation year of the parent ending after the commencement of the winding-up.
6 February 1992 T.I. (Tax Window, No. 16, p. 20, ¶1736)
The fact that a corporation has been dissolved by the order of the Director under s. 241(4) of the Business Corporations Act (Ontario) does not mean that it has been wound-up within the meaning of s. 88(1.1).
23 September 1991 Memorandum (Tax Window, No. 9, p. 5, ¶1469)
The phrase "that business" in s. 88(1.1)(e) refers to the particular business of the subsidiary in which the loss was incurred and not other businesses of the subsidiary or the parent that are merely of the same general nature or type.
IT-302R3 "Losses of a Corporation - The Effect on Their Deductibility of Changes in Control, Amalgamation and Winding-up" 1 January 1995.
Commencement of winding-up
29. ...[G]enerally, the commencement of winding-up is evidenced by a resolution of shareholders authorizing or requiring that the corporation be wound up... .
Example of application of s. 88(1.1)(f) to winding up of calendar y/e Subco into Oct 31 y/e Parent Co
30. Assume Sub Co. commences to wind-up into Parent Co. on October 31, 1990 and Sub Co. incurs a non-capital loss of $1,000,000 for the year ended December 31, 1990. The $1,000,000 loss is deemed under paragraph 88(1.1)(c) to be a non-capital loss of Parent Co. for its taxation year ending October 31, 1991 (i.e. the taxation year of the parent in which the subsidiary's loss year ended). However, the parent's taxation year beginning after the commencement of the winding-up is also October 31, 1991. Since paragraph 111(1)(a) only permits a deduction for non- capital losses in the immediately preceding 3 years and the immediately following 7 years (i.e. not the current year), the non-capital loss will not be available to Parent Co. until its October 31, 1992 taxation year. However, if Parent Co. elects under paragraph 88(1.1)(f), the non-capital loss will be deemed to have arisen in its immediately preceding taxation year (October 31, 1990). Therefore, if the election is made, Parent Co. will be able to deduct the $1,000,000 non-capital loss in its taxation year ending October 31, 1991.
Successive carryforwards
36. Where a subsidiary's net capital losses have been carried forward to the parent company, the provisions of subsections 88(1.1) to (1.3) can be equally applicable to the subsidiary's net capital losses (which are deemed to be losses of the parent) in the event that the parent is wound-up into its parent pursuant to subsection 88(1).
Paragraph 88(1.1)(b)
Administrative Policy
2018 Ruling 2017-0711071R3 - Use of subsidiary losses & ITCs after wind-up
Acquisition of Lossco business
Subsequently to a CCAA filing by Lossco and members of its group, Taxpayer (a wholly-owned subsidiary of a Luxembourg company held by a group of (perhaps U.S.) investors), as limited partner, and its wholly-owned subsidiary, as GP, formed Lossco Business LP, which then acquired the business (the "Lossco Business”) of Lossco pursuant to the “Asset Sale Agreement”. Lossco Business LP thereafter carried on the Lossco Business with a reasonable expectation of profit (the “Continued Lossco Business”). Lossco, which had accumulated non-capital losses and investment tax credits (“ITCs”), was inactive. Taxpayer also earned income through its interests in X LP and Y LP.
Acquisition and wind-up of Lossco
A number of years later, Taxpayer will purchase all of the Lossco shares for nominal consideration and wind-up and dissolve Lossco (which is not expected to have any assets). These transactions will “permit the Taxpayer to utilize Lossco NOLs and ITCs against future income generated by the Continued Lossco Business, the XXXXXXXXXX and income generated from other similar businesses” and will “put the Taxpayer in the same position as if it had purchased all of the issued shares of Lossco, which in the circumstances of the CCAA process, was not possible at the time the Asset Sale Agreement was entered into.”
Rulings
Including that:
[T]he acquisition of the Lossco Business from Lossco by the Lossco Business LP in a separate transaction completed years prior to the Proposed Transactions as more particularly described herein; the fact that Lossco has since been inactive with no assets; and the fact that the Taxpayer carries on the Continued Lossco Business through Lossco Business LP, shall not, in and by themselves, cause: (i) the Taxpayer to fail to satisfy the requirement of paragraph 88(1.1)(b); or (ii) the Continued Loss Business to not be treated as the same as the Lossco Business for purposes of paragraph 88(1.1)(e) and subclause 88(1)(e.3)(i)(C)(I).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(e.3) | purchaser could acquire Lossco’s business through a sub LP and then acquire Lossco, accessing s. 88(1)(e.3) | 148 |
Paragraph 88(1.1)(e)
Administrative Policy
7 October 2011 APFF Roundtable, 2010-0371941C6 F - Application de l'article 80 - fusion/liquidation
A subsidiary that sustained losses and then was subject to an acquisition of control, is then wound up into the parent corporation following which there is a debt settlement. Can the forgiven amount be applied against the non-capital loss of the subsidiary?
CRA indicated that where, following an acquisition of control of a subsidiary, non-capital losses and net capital losses of the subsidiary for taxation years ending before the acquisition of control are precluded from being carried forward under the rules in s. 111(5) and (4), such losses would not be includible in the relevant loss balance of the parent following a winding-up of the subsidiary under s. 88(1) given the application of the rules in s. 88(1.1)(b) and 88(1.2)(b) - unless the condition in s. 88(1)(1.1)(e) continued to be satisfied at the time of the wind-up. In this regard, CRA stated:
[T]he legal fiction provided for in subsection 80(13) as to the source of an amount to be included in computing income under subsection 80(13) is not in itself broad enough to permit the parent corporation to use a non-capital loss of the subsidiary that is subject to the restrictions provided in paragraph 88(1.1)(e), where the subsidiary's business ceased to be carried on.
It seems to us that there is a problem with the interaction of paragraph 88(1.1)(b) and subsection 111(5) where there has been an acquisition of control of the subsidiary that precedes the winding-up of the subsidiary. It is not clear that the condition in paragraph 88(1.1)(b) would be satisfied where the subsidiary's business is transferred to the parent corporation before the beginning of the first taxation year beginning after the commencement of the winding-up, due to the application of the conditions set out in subparagraphs 111(5)(a)(i) and (ii) to the subsidiary. Nevertheless, the CRA accepts that there is a transfer of non-capital losses from the subsidiary to the parent corporation where, immediately before the transfer of the business to the parent corporation, the business was still carried on by the subsidiary in order to make a profit or with a reasonable expectation of profit.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) - Relevant loss balance | NCL of acquired subsidiary preserved for debt forgiveness purposes on amalgamation but lost (if business ceased) on wind-up | 136 |
16 August 2011 Internal T.I. 2011-0401721I7 F - Loss Utilization
Before finding that the non-capital losses of an acquired corporation (whose only sources of income were inter-affiliate loan and subsidiary shares) were from property rather than a business, so that they could not be utilized by the acquirer following the winding-up of the acquired corporation, the Directorate stated:
In order to determine whether the activities of a corporation, related to its investments, constitute in themselves the carrying on of a separate business, the courts have taken into account, inter alia, the following elements: the number of transactions carried out; the size of the funds invested; the frequency of transactions; the nature of the investments as well as the number of employees assigned to the transactions; and the time they spent on investment activities.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 111 - Subsection 111(5) - Paragraph 111(5)(a) | holding company whose only sources of income were inter-affiliate loan and subsidiary shares had losses from property rather than business | 95 |
Paragraph 88(1.1)(f)
Administrative Policy
17 February 1993 External T.I. 9226895 F - Pertes - liquidation
A subsidiary realized losses in its two taxation years preceding its winding-up. Its winding-up commenced in a taxation year of its parent preceding a taxation year of the parent in which the subsidiary was wound-up (being the time of its dissolution, thereby resulting in a short taxation year.) CRA addressed four examples including Situation 3 in which the parent has a taxation year ending on June 30, 1991 and the subsidiary has calendar taxation years but is dissolved on May 1, 1991. CRA stated (TaxInterpretations translation):
The loss of the subsidiary for its year ending May 1, 1991 would be deemed to be a loss of the parent corporation for its taxation year ending June 30, 1991. The making of the election under paragraph 88(1.1)(f) of the Act would permit the loss of the subsidiary for its year ending May 1, 1991 to be deemed to be a loss for the preceding taxation year of the parent (ending June 30, 1990). A loss of the subsidiary derived from its 1990 taxation year could also be the object of an election under paragraph 88(1.1)(f) of the Act since such loss would also be deemed by virtue of paragraph 88(1.1)(c), (d) or (d.1) of the Act to be a loss of the parent corporation for its taxation year ending June 30, 1991, being its taxation year during which the winding-up occurred. Without the election, the 1990 loss of the subsidiary could not be utilized by the parent before the taxation year following the winding-up.
Subsection 88(1.5) - Parent continuation of subsidiary
Articles
Gregory M. Johnson, Wesley R. Novotny, "An Update on Flow-through Shares in the Energy Sector", 2016 Conference Report (Canadian Tax Foundation),12:1-39
Possibility that s. 88(1.5) does not apply following the winding-up distribution and before the dissolution (p. 12:19)
...[N]o subsequent issues under the FTS rules should result on the subsequent windup or amalgamation of the PBC target into the parent. As noted by some commentators, [f.n. 77 Mike J. Hegedus, Andrew Bateman, "A Closer Look at Subsection 88(1.5) of the Income Tax Act", Resource Sector Taxation, (Federated Press) Vol. VIII, No. 3, 2011, p. 591] however, there can be some uncertainty about when subsection 88(1.5) applies in the context of a windup. The possibilities are that subsection 88(1.5) applies (1) on the formal winding up of the subsidiary ("the dissolution date"); or (2) on the effective date of the shareholder resolution and the distribution and assumption agreement ("the effective date").
Under the dissolution-date theory, the timing could have significant consequences if the formal dissolution is delayed. During this gap period, the parent would have acquired the subsidiary's assets on the effective date and presumably would be the only entity incurring qualifying expenses that could be renounced to the FTS holders. Thus, there would be an issue because the original PBC is not incurring the qualifying expenses. If the effective-date theory is correct, there should not be a gap issue. On balance, the effective-date theory is preferable because it is consistent with section 88 and meets the policy objectives of subsection 88(1.5).
Accessing CEE of sub if parent has incurred insufficient CEE (pp. 12:21)
Consider a scenario where a PBC has issued FTS but has failed to incur enough qualifying expenditures to renounce to the FTS holders, but a wholly owned subsidiary has incurred enough qualifying expenditures to make up the shortfall. A potential remedy is to have the PBC undertake a windup or vertical amalgamation with the wholly owned subsidiary. Owing to the continuity language in subsections 87(1.2) and 88(1.5), the new corporation and parent, respectively, are deemed to be the same as, and a continuation of, the predecessors and the subsidiary, as the case may be. Hence, it may be possible to use the CDE and CEE incurred by the subsidiary as renunciations by the new corporation or parent such that the FTS obligations could be met. However, this position is not free from doubt and the better planning structure is to have the parent and subsidiary enter into a back-to-back FTS subscription agreement.
Mike J. Hegedus, Andrew Bateman, "A Closer Look at Subsection 88(1.5) of the Income Tax Act", Resource Sector Taxation, Vol. VIII, No. 3, 2011, p. 591.
Subsection 88(1.7) - Interpretation
Administrative Policy
21 November 2011 External T.I. 2011-0418971E5 - subsection 88(1.7)
Acquisitionco acquires all the shares of Pubco, which are widely held, at the time that a wholly-owned subsidiary of Pubco (Subco) holds the Asset which is to be bumped. Pubco, then Subco, are wound up into Acquisitionco.
The parenthetical exception in s. 88(1.70 would be considered to apply as Acquisitionco would be considered to have acquired control of Pubco as a result of transactions with persons with whom it dealt at arm's length. (Otherwise the taxable dividends paid by Subco to Pubco prior to its acquisition by Acquisitionco would reduce the amount of the bump under s. 88(1)(d)(i.1).)
Subsection 88(2) - Winding-up of Canadian corporation
See Also
Re Martin and F.P. Bourgault Industries Air Seeder Division Ltd. (1987), 45 DLR (4th) 296 (Sask. C.A.)
The appellant, which manufactured air seeders in one plant, and cultivators in its other plant, transferred its cultivator division, which represented 55% of the value of its assets and 57% of its sales, to a new company. This did not constitute a sale of "all or substantially all" its property for purposes of s. 183(2) of the SBCA.
85956 Holdings Ltd. v. Fayerman Bros. Ltd., [1985] 2 WWR 647 (Sask QB)
A sale by a wholesale-retail merchant of all its inventories would destroy its business, and accordingly would constitute "a sale, lease or exchange of all or substantially all the property of [the] corporation", notwithstanding the retention by the corporation of its real estate (s.183(2), Business Corporations Act (Sask.)).
Administrative Policy
26 November 2014 External T.I. 2014-0551641E5 F - Winding-up and subsection 42(1)
A corporation was to be liquidated as described in s. 88(2) and to be dissolved upon receipt of provincial and federal notices of assessment for the year of asset distribution. However, dissolution was postponed upon receiving a demand respecting latent defects in an immovable which it had sold at a capital gain in a previous year. Would the corporation be considered to have been wound up at the end of the year in which it distributed its assets for purposes of s. 88(2)? What is the treatment of any claim ultimately paid and related professional fees? CRA stated (TaxInterpretations translation):
[T]he position described in paragraph 5 of IT-126R2….remains the position of the CRA. Thus, if the conditions enumerated therein are satisfied…the corporation can be considered to have been wound up on [that] date… .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 42 | corporation permitted to claim litigation loss following effective time of winding-up | 94 |
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) | effective time of winding-up not delayed by potential litigation liability | 94 |
10 December 2013 External T.I. 2013-0480771E5 F - Winding-Up of a Corporation
The correspondent queried the accuracy of the statement in the T2 Guide that on a s. 88(2) winding-up, s. 88(2)(a)(iv) indicates that the taxation year of the corporation is deemed to end immediately before the wind-up, with the result that the taxpayer should "file a return for the tax year that ends immediately before the wind-up date," and can choose a year-end for the new taxation year commencing immediately thereafter. In agreeing that this statement is incorrect (and will be "withdrawn" in the next edition of the Guide, along with line 064 of the T2 form), CRA stated (TaxInterpretations translation):
[S]ubparagraph 88(2)(a)(iv) deems a corporation to have a taxation year end only for the purposes of certain calculations, in particular, of the capital dividend account.
Consequently, the deemed taxation year end generally does not entail, for the wound-up corporation, the obligation to prepare an income return and does not, by itself, affect its taxation year for other purposes.
2013 Ruling 2012-0443081R3 - Distribution of pre-72 Capital Surplus on Hand
Current situation
ACo, which is a Canadian-controlled private corporation (with an RDTOH balance) owned by cousins (an unrelated group), owns Class B shares of BCo (which were acquired after V-day) and Class F shares of BCo (which were held on V-day). BCo is a CCPC, holds loans receivable and has pre-72 CSHOH balances as a result of sales of capital properties which had been held on V-Day. ACo and BCo deal at arm's length. The shareholders of ACo wish "to arrange for the receipt of pre-72 CSOH in conjunction with the disposition of the assets giving rise to such pre-72 CSOH."
Proposed transactions
- The two family groups of shareholders of ACo will exchange (on a "dirty" s. 85 rollover basis) their Class A and B common shares of ACo (as well as Class D preferred shares) for (i) Class Z preferred shares of Aco having a redemption value equal to the portion of the exchanged shares' value which is attributable to the Class F shares of BCo shares held by Aco, (ii) Class Z.1 shares of Aco whose redemption value is equal to the adjusted cost base of the exchanged shares minus the redemption value of the Class Z shares, and (in the case of the exchanged Class A and B shares) (iii) new common shares (Class X or Y) of Aco.
- They will then transfer their Class Z preferred shares of ACo to Newco under s. 85(1) for Class A shares of Newco (in the case of former Class A or B common shareholders of Aco) and for Class 1 to 3 preferred shares of Newco (in the case of previous preferred shareholders of Aco); a similar pref-for-pref transfer occurs re Class D shares of ACo.
- ACo will transfer its shares of BCo to Newco for Class 4 preferred shares (in order "to transfer ACo's entitlement to pre-72 CSOH to Newco"), and will elect under s. 85(1) "to ensure that paragraph 88(2.2)(b) applies on the transfer"; PUC will allocated to the Class 4 preferred shares equal to the PUC of the ACo shares held by Newco "to ensure that the deemed dividends on the redemptions [in 4 below] will be equal;"
- There will be a cross-redemption of shares between ACo and Newco in consideration for promissory note issuances, giving rise to equal dividends (as a result of the PUC of the Class 4 preferred shares of Newco being established with this end in view), with the promissory notes then being set-off.
- BCo will be wound-up and its remaining assets (being cash in an amount not exceeding its pre-72 CSOH) will be distributed ratably to its shareholders, including ACo and Newco.
- Newco then will be wound-up, with each shareholder receiving its remaining asset, being cash.
- Newco will establish a fiscal year end immediately after 4 "to avoid the possibility of other transactions which could impact the RDTOH balance of Aco."
Rulings
Include:
- S. 88(2)(b)(ii) will apply to deem portions of the winding-up dividends received (a) by Aco (in respect of its Class B shares) and Newco (in respect of its Class F shares) on the winding-up of Bco, and (b) by Newco shareholders on the Newco winding-up, not to be dividends.
- S. 55(2) will not apply to the cross-redemption in 4 provided that the shares' fair market value does not exceed theri adjusted cost base.
- S. 88(2.2)(b) will apply to the transfer of the Class F shares of BCo to Newco in 3 such that Newco will be deemed to have owned the Class F shares on December 31, 1971, and Newco will be deemed to have acquired them at an actual cost equal to the actual cost thereof to ACo.
- S. 88(2.1)(b) will apply on the disposition of the Class F shares of BCo by Newco, such that the excess of the lesser of their proceeds of disposition and V-day value over their actual cost under s. 88(2.1)(b) will be added to the pre-72 CSOH of Newco.
- S. 245(2) will not apply (with the summary stating that "the distribution of the pre-72 CSOH of ACo to its shareholders without winding-up ACo under subsection 88(2)...[accords with] previous GAAR Committee conclusions.")
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 186 - Subsection 186(1) | circularity issue | 609 |
| Tax Topics - Income Tax Act - Section 54 - Personal-Use Property | 110 |
Articles
O'Connor, "Revisiting Pre-1972 Capital Surplus on Hand (the More Things Change, the More They Stay the Same)", Personal Tax Planning, 1996 Canadian Tax Journal, Vol. 44, No. 2, p. 501.
Paragraph 88(2)(a)
Articles
Derek T. Dalsin, "ECP-Related CDA Dividend “In the Course of a Winding Up” Pre-2017", Canadian Tax Highlights, Vol. 27, No. 8, August 2019, p. 1
No increase to CDA balance from eligible capital amount until year end (p. 1)
[I]n order for a capital dividend account (CDA) to arise out of a cumulative ECP gain, there had to be a negative balance in the account at the year-end that included the event … .
But increase to CDA immediately before s. 88(2) winding-up dividend (p. 1)
There are situations where an ECP sale- or ECP transaction- based CDA may be established before the normal fiscal year-end without attracting part III tax. Such a dividend can be paid before the corporate taxpayer's fiscal year-end if it is done in the course of a winding up….
Paragraphs 88(2)(a) and (b) establish that if a business of a corporation is wound up, and at a particular time in the course of the winding up, corporate property is distributed to its shareholders, then
- pursuant to paragraph 88(2)(a), for the purposes of computing the corporation's CDA, at the "time of computation" that is "immediately before the particular time," there is a special purpose deemed year-end (not a compliance year-end) for CDA determination purposes (hence the cumulative ECP CDA add-on should be there for CDA computation purposes); and
- pursuant to paragraph 88(2)(b), the CDA dividend is deemed paid for the purposes of subsection 83(2).
Therefore, it is arguable that if a capital dividend election is made prior to the normal course fiscal year-end of the corporation (but in the course of the winding up), coupled with the deemed special purpose year-end, the minister cannot assess under part III for an excessive CDA elected amount….
Scope of: in the course of the winding-up (p. 2)
The sale of a business that included cumulative ECP gain should be viewed as a step in the course of a winding-up of the business that was sold.
Paragraph 88(2)(b)
Subparagraph 88(2)(b)(i)
Administrative Policy
6 October 2017 APFF Roundtable Q. 4, 2017-0709021C6 F - CDA and Winding-up of a corporation
Where, at the moment of a winding-up described in s. 88(2), the corporation holds portfolio investments or other assets whose fair market value (“FMV”) fluctuates, it is not possible to determine in advance the capital gain that is deemed to arise on the winding-up, so that it is not possible to make an election within the time required under s. 83(2). Is relief available?
CRA responded:
In a context similar to that described ... the portion of the winding-up dividend, deemed to be the total amount of a separate dividend (the "Separate Dividend") for an election under subsection 83(2) (the “Election"), will always be equal to the CDA balance at the time of computation. Accordingly, the accuracy of the amount of the Separate Dividend depends on the final CDA balance, as determined by the CRA. ...
[W]hen the balance of the CDA, as determined by the CRA, differs from the balance calculated by the corporation at the time an election is to be made, the CRA will adjust the amount of the Separate Dividend as well as the Form T2054 ... .
...While under normal circumstance the CRA expects a resolution to refer to the total amount of a dividend subject to an election, which should be the same as that on the Form T2054, the CRA can accept, under these particular circumstances, such an amount not being specifically stated in that resolution.
Subsection 88(2.1)
Administrative Policy
15 October 1991 T.I. (Tax Window, No. 11, p. 8, ¶1525)
In determining the actual cost to a corporation of land owned by it on December 31, 1971 and disposed of after 1978, damages received by it in respect of the land must be ignored.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base | 44 |
Subsection 88(3) - Liquidation and dissolution of foreign affiliate
See Also
Dauphin Plains Credit Union Ltd. v. Xyloid Industries Ltd., 80 DTC 6123, [1980] CTC 247, [1980] 1 S.C.R. 1182
The appellant was a secured debentureholder who, following default by the debtor (“Xyloid”), obtained a court order for the appointment of a receiver. Xyloid had paid only the net amount of wages to employees prior to the appointment of the receiver, and did not have the funds to remit the required amount of source deductions. S. 71(3) of the Unemployment Insurance Act, 1971 (and somewhat similarly a CPP provision) provided that “in the event of any liquidation, assignment or bankruptcy of an employer,” there was a deemed trust in favour of the federal Crown equal to the applicable source deduction amount “whether or not that amount has in fact been kept separate and apart… .”
In finding that the process followed by the receiver amounted to a “liquidation” of Xyloid, Pigeon J stated (at pp. 6129-6130):
We are here dealing with a receivership which was completed by the sale and distribution of all the assets of the employer company. In the statutes of Canada as they stood when the two provisions we have to construe were enacted, “liquidation” was not the word used to describe the voluntary or forced distribution of the asset of a company, the word used was “winding-up… . However, the word liquidation was sometimes used to describe this process of dissolution of a company… .
It seems to me that it would not make sense to hold that, because the assets of a company were realized by a receiver appointed at the request of a creditor rather than by a liquidator or a trustee in bankruptcy appointed by a court, the claim for wages should fail. It appears to me that there is no reason not to give the word “liquidation’ its wide meaning in usual language.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 153 - Subsection 153(1) - Paragraph 153(1)(a) | receiver-manager included | 23 |
| Tax Topics - Income Tax Act - Section 159 - Subsection 159(2) | 34 | |
| Tax Topics - Income Tax Act - Section 227 - Subsection 227(5) | 39 | |
| Tax Topics - Statutory Interpretation - Interpretation Act - Section 17 | 36 |
Administrative Policy
16 May 2018 IFA Roundtable Q. 5, 2018-0745501C6 - Meaning of “merged or combined” in 40(3.5)(c)(i)
Canco sold all the shares of FA to Canco’s wholly-owned subsidiary (Subco) and realized a capital loss that was suspended under s. 40(3.4). In a subsequent year, Subco wound -up FA under s. 88(3). This would have de-suspended the loss but for s. 40(3.5)(c)(i), which applies if the particular corporation which, in fact, disappeared (FA) would be considered to have been “merged or combined” with another corporation (Subco) to “form” a corporation.
CRA considered that the loss continued to be suspended:
- “Merged or combined” encompasses a winding-up or liquidation given inter alia the exclusion, in various provisions listed by it, of a winding up or liquidation from a “merger;” and
- “Formed” includes an entity in place after a reorganization (for example, a s. 86(1) reorganization), even though no new entity may be formed in the traditional sense - so that Subco was considered to have been “formed” on its s. 88(3) winding-up of FA under a “QLAD.”
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.5) - Paragraph 40(3.5)(c) - Subparagraph 40(3.5)(c)(i) | suspended loss on the sale of CFA to Subco was not de-suspended on s. 88(3) wind-up of CFA | 199 |
17 July 2014 External T.I. 2014-0536331E5 - Foreign affiliate liquidation and dissolution
Can property that is deemed to have been disposed of by paragraph 88(3)(b) be "excluded property" of the affiliate at the relevant time? In particular, given that s. 88(3)(b) deems property to be disposed of at the time the taxpayer receives it, could the distributed property ever qualify as excluded property at that time under paragraph (a) of the excluded property definition? CRA stated:
[P]roperty that is used or held by a foreign affiliate for the purpose of gaining or producing income from an active business immediately before its distribution on the liquidation and dissolution of the affiliate will be excluded property at the time of the deemed disposition described in paragraph 88(3)(b) of the Act. Accordingly, any taxable capital gain or allowable capital loss that arises when such property is deemed to have been disposed of by a foreign affiliate to a taxpayer pursuant to paragraph 88(3)(b) of the Act will not be included in the computation of variables B and E of the definition of "foreign accrual property income" in subsection 95(1) of the Act.
14 August 2008 External T.I. 2004-0104691E5 - Conversion of a LLC to a LP
where a Delaware LLC governed by the Delaware Limited Liability Company Act is converted into a limited partnership pursuant to s. 17-217 of the Limited Partnership Act, there will be considered to be a disposition of the property of the LLC and of the shares in the LLC.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Corporation | Del. LP a partnership | 70 |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition | LLC conversion to Delaware LP | 48 |
26 October 2007 External T.I. 2005-0137641E5 - Dissolution of Foreign Affiliate
A loan is made by a controlled foreign affiliate of a taxpayer to the taxpayer immediately before the dissolution of the affiliate. Does the loan amount increase the taxpayer's proceeds of disposition of the shares of the foreign affiliate under s. 88(3)? CRA responded:
[T]the non-share property of a foreign affiliate of a taxpayer would include any rights that the foreign affiliate has as a creditor of the taxpayer. In circumstances where a loan receivable is distributed to the taxpayer on the dissolution of the foreign affiliate, we would consider it to be disposed of to, and received by, the taxpayer whether or not the obligation to pay is extinguished as a result of the taxpayer acquiring the loan receivable (see, in this respect, paragraph 69(5)(b) and proposed subparagraph 88(3)(b)(ii) which deem a shareholder of a dissolving corporation to have acquired the property distributed or appropriated to the shareholder). Accordingly, it is our view that the fair market value of the loan receivable would be included in the taxpayer's proceeds of disposition of the shares of the dissolving affiliate under both the current and proposed versions of subsection 88(3).
IT-126R2, "Meaning of 'Winding-Up' ", March 20, 1995
8. The phrase "on the winding-up", as used in subsection 88(1) for a corporation or in subsection 84(2) for a corporation's business, means that period of time during which the winding-up takes place. In the case of the winding-up of a corporation the period ends at dissolution. The phrase "in the course of winding-up" in subsection 88(2) refers to the same period of time.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition | 223 | |
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) | 132 |
Articles
Patrick Marley, "Foreign Affiliate Mergers and Liquidations - Navigating Proposed Changes", Canadian Current Tax, Vol. 16, No. 12, September 2006, p. 125.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(d.1) | 0 |
Dale S. Meister, "Foreign Affiliate Update", Canadian Petroleum Tax Journal, Vol. 19, No. 1
Includes summaries of comfort letters and CRA 2006 IFA pronouncements.
Paragraph 88(3)(d)
Administrative Policy
3 February 2016 External T.I. 2014-0548111E5 - U.S. tax paid in respect of an LLC's income
Mr. A, Canadian resident and citizen, was a members of an LLC carrying on a U.S. active business and which was treated as a partnership for Code purposes. LLC (which was not a controlled foreign affiliate of Mr. A) made a pro rata distribution of all its property in 2014 on a liquidation and dissolution (“L&D”), including a distribution of $2500 to Mr. A, thereby giving rise to a $2,000 capital gain on his LLC shares. Would any portion of the $2500 received on the L&D be a deemed dividend? CRA responded:
[N]o portion of the $2500 distributed to Mr. A in the course of the L&D… would be deemed to be a dividend. ... Mr. A will have a resulting taxable capital gain of $1000... .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 126 - Subsection 126(7) - Non-Business-Income Tax | LLC tax paid by Cdn member not re business | 163 |
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(11) | only income was taxable capital gains | 131 |
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(12) | s. 20(14) deduction for US operating-income taxes imposed on Cdn LLC member even where his only Cdn income from LLC is taxable capital gain | 418 |
| Tax Topics - Income Tax Act - Section 126 - Subsection 126(1) | FTC for US operating-income taxes imposed on Cdn LLC member even where his only Cdn income from LLC is taxable capital gain | 316 |
| Tax Topics - Treaties - Income Tax Conventions - Article 24 | Treaty sourcing rule does not trench on domestic FTC | 208 |
9 January 2003 Internal T.I. 2002-0178147 - Dissolution of foreign Affiliate
Canco owns 100% of the shares of FA1 having an adjusted cost base of $10. FA1 holds cash of $50 and 100% of the shares of FA2 having an ACB of $10. FA1 is dissolved immediately after its normal (calendar) year-end and its assets are distributed to Canco at that time. Before going on to discuss issues respecting levitation of surplus, CRA stated:
Absent any 93(1) elections being made, pursuant to paragraph 88(3)(b) Canco's proceeds of disposition of its shares of FA1 will be $60 (represented by the $50 cash received on dissolution and the $10 adjusted cost base of the shares of FA1) resulting in a $50 capital gain.
It is our view that the dissolution of FA1 involves a two-step process. The first step is the distribution of the assets of FA1 to Canco and the second step is the disposition by Canco of its shares of FA1. To state another way, it is our opinion that the opening words to subsection 88(3), "Where on the dissolution of a controlled foreign affiliate ... of a taxpayer ... one or more shares of the capital stock of another foreign affiliate of the taxpayer have been disposed of to the taxpayer ..." is simply describing the conditions that must be satisfied "in the course of" or "as part of" the dissolution in order for subsection 88(3) to apply. It does not mean, or imply, that the two dispositions occur simultaneously.
16 January 1998 External T.I. 9722935 - DISTRIBUTIONS FROM U.S. CORPORATION
In the course of a general response as to the consequences of winding-up a U.S. corporation, CRA stated:
…[S]ubject to subsections 88(3) and 93(1) of the Act, if the non-resident corporation is dissolved and if the property of the non-resident corporation is distributed to the Canadian shareholder as part of such dissolution and the Canadian shareholder became entitled to receive such property by virtue of the dissolution proceedings, we are of the view that such property constitutes proceeds of disposition. The Department's position as to the timing of the disposition of the shares of the non-resident corporation would be as set out in paragraph 9 of Interpretation Bulletin IT-126R2.
Subsection 88(3.3) - Suppression election
Articles
Geoffrey S. Turner, "June 2014 Election Deadlines for Retroactive Application of New Foreign Affiliate Reorganization Rules", CCH International Tax, No. 74, February 2014, p. 1.
Suppression election addresses excess of inside over outside basis (p. 6)
Importantly, new subsection 88(3.3) provides for a "suppression election" opportunity, if the liquidation is electively treated as a QLAD, so as to "suppress" the cost of the distributed capital properties received by the Canadian taxpayer to the elected amounts. [fn 11: Subsection 88(3.4) establishes the limits for the suppression election. Essentially, for each distributed capital property the claimed proceeds of disposition must be no greater than they otherwise would have been (cannot elect to increase proceeds), and the aggregate suppressed proceeds on all distributed properties must not exceed the taxpayer's capital gain amount on the shares of the liquidating foreign affiliate (cannot suppress to such an extent that the gain becomes a loss).] The effect of a suppression election is to reduce the net distribution amount, and thus reduce the Canadian taxpayer's proceeds of disposition of the shares of the liquidating foreign affiliate. Therefore, a QLAD election combined with a suppression election enables the taxpayer to minimize or avoid the capital gain on the shares of the liquidating foreign affiliate that would otherwise be realized if the "inside basis" exceeds the "outside basis". The subsection 88(3.3) suppression election must also be made in accordance with Regulation 5911(1), with a deadline of June 26, 2014 for historic foreign affiliate liquidations commencing after February 27, 2004. [fn 12: See subsection 88(2) of Bill C-48.]
Eric Lockwood, Maria Lopes, "Subsection 88(3): Deferring Gains on Liquidation and Dissolution", Canadian Tax Journal (2013) 61:1, 209-28, p. 209
They use the facts in the example below (set out at p. 215) to illustrate in various scenarios that a taxpayer (Canco) will realize a capital gain on the disposition of its shares of the disposing affiliate (Foreignco 1) – even where there has been a qualifying liquidation and dissolution (QLAD) election - where the adjusted cost base of Foreignco 1 in the distributed property, i.e., the inside basis, exceeds Canco's ACB of its Foreignco 1 shares, i.e., the outside basis:
Assumptions
Canco is a company incorporated and resident in Canada for the purposes of the Act. Foreignco 1 is a wholly owned FA of Canco. Canco's ACB in the shares of Foreignco 1 is $1,000. Foreignco 1 is a holding company whose only asset is the shares of Foreignco 2. Foreignco 1 acquired the shares of Foreignco 2 for $2,500. Foreignco 2 has exempt surplus of $1,500. The FMV of the shares of Foreignco 2 exceeds $4,000. Foreignco 1 has no liabilities. Canco wishes to liquidate Foreignco 1. In the course of the liquidation and dissolution, Foreignco 1 distributes the shares of Foreignco 1 to Canco….
They then turn (at p. 220) to the potential relief provided by the suppression election:
… Canco can elect under proposed subsection 88(3.3) for Foreignco 1 to have disposed of its shares of Foreignco 2 for PD equal to a claimed amount of $1,000. The consequences under proposed subsection 88(3) are then as follows:
1. Foreignco 1 is deemed to have disposed of its shares of Foreignco 2 for PD [proceeds of disposition] equal to the claimed amount of $1,000. Foreignco 1 realizes a capital loss of $1,500 on the disposition of its shares of Foreignco 2. If the shares of Foreignco 2 are not excluded property, the loss will be suspended pursuant to the proposed amendment to subsection 40(3.3) and paragraph 40(3.4)(a). Because the liquidation and dissolution is elected to be a QLAD, the loss would not be released under proposed subparagraph 40(3.4)(b)(v). Furthermore, the suppression consequences are ignored under paragraph (a) of the amended description of E in the FAPI definition in subsection 95(1). Thus, it does not appear that a suppression election could be used to generate a foreign accrual property loss. [fn 26: See the proposed amendment to the definition of "foreign accrual property loss" in regulation 5903(3).]
If the shares of Foreignco 2 are excluded property, the stop-loss rules do not apply to suspend the loss….
2. Canco is deemed to have disposed of its shares of Foreignco 1 for PD equal to the NDA in respect of the distribution of the shares of Foreignco 2 ($1,000). Therefore, Canco does not realize a capital gain or loss on the disposition of its shares of Foreignco 1.
Consequently, the suppression election under proposed subsection 88(3.3) enables Canco to fully eliminate the capital gain that it would otherwise realize on the disposition of its shares of Foreignco 1. This alternative also preserves Foreignco 2's exempt surplus balance of $1,500….
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 93 - Subsection 93(1) | 413 | |
| Tax Topics - Income Tax Regulations - Regulation 5905 - Subsection 5905(7.2) | 577 |
Subsection 88(3.4) - Conditions for subsection (3.3) election
Articles
Clara Pham, Alex Feness, "CFA Suppression Election: Potential Risks", Canadian Tax Focus, Vol. 3, No. 3, August 2013, p. 2
Basic illustration of operation of s. 88(3) where suppression election needed
…assume that Canco 1 owns all the shares in CFA 2, which owns all the shares in CFA 3. Canco 1's ACB in its shares in CFA 2 is $100, and CFA 2's ACB in its shares in CFA 3 is $200. On the liquidation of CFA 2, CFA 2's shares in CFA 3 are deemed to be disposed of for proceeds equal to $200 (paragraph 88(3)(1)). without a subsection 88(3.3) election, Canco 1 would realize a gain of $100 – proceeds of $200 less ACB of $100 (paragraph 88(3)(d)). However, the suppression election can reduce the taxpayer's deemed proceeds to $100, thereby eliminating an immediate gain on Canco 1's disposition of its shares in CFA 2.
Problem posed by claimed-amount limit and "is not valid" language
Paragraph 88(3.4)(b) limits the suppression election to the capital gain that would otherwise be realized on the shares of the disposing affiliate, thus preventing a taxpayer from producing a loss on the disposition of its share in the FA. A problem arises when a taxpayer incorrectly computes the ACB of its shares in the disposing affiliate.
Example of problem
For example, if Canco 1's ACB in its shares in CFA 2 were actually $101 instead of $100, then an election to suppress the proceeds of CFA 2 shares to $100 would be overstated. This would fall afoul of paragraph 88(3.4)(b) and cause Canco 1 to realize a gain of $99 (proceeds of $200 – ACB of $101) rather than the desired deferral.
Subsection 88(4) - Amalgamation deemed not to be acquisition of control
Paragraph 88(4)(b)
Commentary
S. 88(4)(b) provides that an amalgamated corporation is deemed to be the same corporation as, and a continuation of, its predecessor for purposes of ss. 88(1)(c), (c.2). (d) and (d.2) and "for greater certainty" (c.3) to (c.9) and (d.3).
Ambiguity can potentially arise as to which of the predecessors of an amalgamated corporation is being referenced under this rule. CRA states (in 2002-0130715) that this choice turns on which predecessor is "relevant to [the] situation, having regard to all the circumstances including the provision to which subsection 88(4) is being applied."
Furthermore, it likely would be appropriate for this interpretive exercise to be informed by a presumed legislative intent to match the results of a vertical amalgamation to what would have occurred under a s. 88(1) winding-up. Although s. 87(11) specifically references the bump results which would have applied to a s. 88(1) bump "if…[s. 88(1.7)] had applied to the winding-up" without specifically referencing s. 88(4), this likely is not required as s. 88(4) is a provision dealing specifically with amalgamations.
The midamble of s.88(1)(c) requires that the assets of the subsidiary to be bumped be capital property which were owned by the subsidiary from the time of the acquisition of its control by the parent. If that subsidiary itself is the result of an amalgamation of a parent (Target) and a subsidiary (Subco) which held the capital property to be bumped, this requirement would not be satisfied where the amalgamation of Target and Subco occurred after the acquisition of their control by parent: the new corporation resulting their amalgamation (Amalco) did not itself own the property to be bumped at the time of the acquisition of control of its predecessors.
This issue is resolved by s. 88(4)(b) as CRA is willing to interpret it as indicating that in this regard Amalco is a continuation of Subco. See 2007-0240271R3 and 2012-0451421R3.
Example 4-A (Target amalgamation with Subco before amalgamation with Bidco)
Bidco acquires Target from its shareholders for cash. Target holds Subco which holds shares of subsidiaries (the Sale Assets) which are capital property and which Bidco wishes to bump.
Target amalgamates with Subco to form Amalco, then Bidco amalgamates with Amalco.
Analysis. In order for the second amalgamation to result in a bump of the Sale Assets, the subsidiary (Amalco) must satisfy the requirement in the midamble of s.88(1)(c) that the Sale Assets have been owned by it continuously from the time of the acquisition of its control by the parent (Bidco). CRA's practice is to consider Amalco in this regard to be a continuation of Subco, so that it will satisfy this requirement by virtue of Bidco having acquired control of Subco and the Sale Assets having been owned by Subco from then to the time of the second amalgamation.
S. 88(1)(c.4)(iii) provides that shares of a taxable Canadian corporation are specified property if they were received as consideration for the acquisition of shares of the subsidiary by it or by the parent (where the parent was a "specified subsidiary corporation" of it, such as a wholly-owned subsidiary). Suppose that shares of Target are acquired in consideration for shares of a parent (Pubco) of the acquirer of Target (Bidco). However, the assets to be bumped are held in a subsidiary of Target (Subco) rather than in Target itself, so that an amalgamation of Target with Subco to form Amalco precedes the amalgamation of the parent (Bidco) with the subsidiary (Amalco) which is intended to produce the bump. The question arises as to whether such parent (Amalco) can satisfy the requirement that the shares of Pubco were received by the Target shareholders in consideration for their shares of Amalco – when in fact, the Pubco share were instead issued in consideration for the acquisition of the shares of a predecessor of Amalco, namely, Target.
In these circumstances, CRA considers that Amalco is to be viewed by virtue of s. 88(4)(b) is a continuation of Target, so that the s. 88(1)(c.4)(iii) test is satisfied. See 2001-0110363 and 2002-0130715. A similar issue and resolution arises under s. 88(1)(c.4)(i) where the bid consideration is shares of the parent rather than its shareholder.
Example 4-B (Exchange of shares of Target for Pubco shares followed by bottom-up amalgamations)
Bidco (a subsidiary of Pubco) acquires Target from its shareholders in consideration for shares of Pubco which (post-acquisition) derive more than 10% of their FMV from the property of a subsidiary of Target (Subco). Subco holds shares of subsidiaries (the Sale Assets) which are capital property and which Bidco wishes to bump.
Target amalgamates with Subco to form Amalco, then Bidco amalgamates with Amalco.
Analysis. Given that the Target shareholders become Pubco shareholders and they are not specified persons, it is necessary to establish that the Pubco shares received by them are specified property. To be specified property, the Pubco shares must qualify under s. 88(1)(c.4)(iii) as shares of a taxable corporation (Pubco ) which were received as consideration for the acquisition of the shares of the subsidiary (Amalco) by the parent (Bidco). CRA's practice is to consider Amalco in this regard to be a continuation of Target, so that it will satisfy this requirement by virtue of the Pubco shares having been received by the Target shareholders in consideration for their Target shares.
The above examples were situations where the subsidiary (Subco) holding the property to be bumped was first amalgamated in a non-bump transaction with the Target before the Target was amalgamated with the acquirer of the Target shares. Another approach to a top-down amalgamation approach, so that there first is an amalgamation of the acquirer (Bidco) with Target (intended to bump the shares of Subco) followed by an amalgamation of the resulting Amalco with Subco (intended to bump the underlying property). Here CRA likely would consider that Amalco acquired control of Subco when its predecessor (Bidco) acquired control of Subco.
Essentially the same issue arises where an estate wishes to bump property held in a lower-tier subsidiary.
Example 4-C (post-mortem sequential top-down vertical amalgamations)
Facts. Upon his death, Individual owned all the shares (with accrued gain) of Investmentco. Among its other assets, Investmentco held preferred shares (with accrued gain) of Freezeco as well as special voting shares (giving it control) of Frezeco. A family inter vivos trust (Trust) owned all the Freezeco common shares. Freezeco owned 20% of the common shares of Opco, with an accrued gain, which it acquired from Investmentco on a s. 85(1) rollover basis in an estate freeze transaction.
Transactions. Following the death of Individual, the executors of his estate (the Estate) transfer the shares of Investmentco (whose cost has been stepped-up on death under s. 70(5)) to a newly-incorporated corporation (Parentco), of which it owns all the shares, in consideration for a demand promissory note.
Parentco amalgamates with Investmentco. This is targeted to bump the ACB of the Investmentco shares in the hands of Amalco.
Trust transfers its common shares of Freezeco to Amalco in consideration for common shares of Parentco, and elects under s. 85(1) with Amalco for this to occur on a rollover basis. (This is necessary so that Freezeco can be wholly-owned by Amalco.)
Amalco amalgamates with Freezeco. This is targeted to bump the ACB of the Opco common shares in the hands of Amalco II.
First bump. In the absence of s, 88(1)(d.2), Parentco acquired control of Investmentco when it acquired its shares, given that the s. 256(7) rules do not apply for purposes of s. 88(1). As Parentco acquired control of Investmetco from a non-arm's length person, it is deemed to have acquired control of Investment control when such control was acquired by the Estate. Under s. 88(1)(d.3) this is deemed to be the time immediately after death.
S. 87(11)(b) deemed Amalco to have acquired the preferred shares of Freezeco at what would have been their deemed cost had such shares instead been distributed at that time on a s. 88(1) winding-up. The Opco shares of the subsidiary (Investmentco) were not acquired from the parent (Parentco) so that the Opco shares are not ineligible property under s. 88(1)(c)(v) and those shares were owned by Investmentco at and after the acquisition of its control. Accordingly, the bump should be available.
Second bump. Respecting the second amalgamation, s. 88(4)(b) deems Amalco to be a continuation of Parentco, so that Amalco (viewed as the parent) is to be treated as having acquired control of Freezeco at the same time as Parentco did. There is nothing in the fact that Amalco also is a continuation of Investmentco which detracts from this previous acquisition of control by Parentco.
S. 88(1)(c)(v) would deny the bump on the Opco shares if the subsidiary (Freezeco) had previously acquired the Opco shares from the relevant parent if the parent had acquired control of the subsidiary as part of the same series of transactions. In fact, the Opco shares previously had been acquired by it from Investmentco, a predecessor of Amalco. However, it was not Investmentco (but, rather, Parentco) which was the parent which acquired control of Freezeco; and the distinctness of these two transactions likely would suggest that they were not part of the same series of transactions. Furthermore, if the mergers had been accomplished through a winding-up of Investmentco into Parentco followed by a winding-up of Freezeco into Parentco, this issue would not have arisen, and a likely legislative intent to match the results of this alternative transaction likely should inform the application of s. 88(4)(b), so that the relevant predecessor parent of Amalco should be considered to be Parentco rather than Investmentco. The relevant subsidiary (Freezeco) owned the shares to be bumped (of Opco) throughout the period following the acquisition of its control by Parentco, as required in the midamble of s. 88(1)(c).
Administrative Policy
2012 Ruling 2012-0451421R3 - Purchase of Target and bump
After giving effect to preliminary transactions relating to the Bidco structure:
- a non-resident public company (Parent) is the sole shareholder of another non-resident corporation (Parent Subco), which is the principal shareholder of New Holdco (a taxable Canadian corporation and not a public corporation), which holds all the shares of Bid Holdco (a taxable Canadian corporation), which holds Bidco, a taxable Canadian corporation
- the only significant investor in the shares of Target (a taxable Canadian corporation and a listed public corporation) is Investor, which in a Lock-Up Agreement has agreed for itself and all related persons not to acquire any shares of Target, certain Buyers referred to below or Parent, or to acquire "Restricted Assets," within the following X years; Target assets following the acquisitions below will form only a small part of Parent's business or that of the 1st and 3rd Buyer described below
- three "Buyers" (the first and third of which is partly owned by Investor) have agreed to buy certain Target assets under a Plan of Arrangement and have represented to Bidco that they do not hold (or, in the case of the second Buyco, hold no more than X% thereof) and will not acquire any Target common shares as part of the series of transactions, and will not within X years allow a "Restricted Person" to acquire directly or indirectly any transferred asset or any property substituted (for purposes of s. 88(1)(c)(vi)) for a transferee asset, other than securities listed on a stock exchange, as to which it will instruct each underwriter engaged by it not to accept orders from Restricted Persons
Under the proposed transactions:
- Target common shares of dissenters will be transferred to Bidco for their fair value
- notes of Target will be amended, with Parent paying consent fees and with the agreement of Target to reimburse it therefor; Parent and Parent Subco will guarantee payment of the amended notes
- Target and a wholly-owned Canadian subsidiary thereof (Subco 1) will amalgamate to form Target Amalco (the Target Amalgamation)
- Target Amalco will implement various "packaging transactions" under which it will transfer assets on a rollover basis to newly-formed Canadian subsidiaries (New Subcos), including New Target
- Bidco will use share subscription proceeds indirectly derived from money borrowed by Parent Subco from third party lenders (who are believed to not be persons described in s. 88(1)(c)(vi)(B)) to make a loan to Target Amalco to repay credit facilities
- at the "Transfer Effective time" under the Plan of Arrangement, Bidco will acquire all the Target Amalco common shares for cash; and outstanding Target Amalco management stock options, restricted share units and deferred units will be disposed of to Target Amalco for cash payments
- Target Amalco will elect to cease to be a public corporation
- the stated capital of the shares of Subco 2 (a taxable Canadian subsidiary of Target Amalco) and New Target will be reduced
- Target Amalco, Subco 2 and New Target will amalgamate to form Target Amalco 2 (the Target Amalco Amalgamation)
- following a reduction of the stated capital of Target Amalco 2's shares, Bidco and Target Amalco 2 will amalgamate to form Amalco (the Amalgamation)
- various debts of Subco 3 (a subsidiary of Amalco) will be redonominated into Canadian dollars
- various transactions respecting distributions of stated capital by Amalco up the chain and loan transfers are not described here; such stated capital distributions will include the distribution of proceeds derived from the disposition by Subco 15 (a subsidiary of Subco 3) and Subco 16 (a subsidiary of Subco 15) of properties to a member of the Parent group
- the Buyers will exercise their purchase rights by acquiring subsidiaries of Amalco including New Subcos
- Target Amalco and its subsidiaries will elect not to have s. 256(9) apply with respect to the acquisition of control by Bidco
- Amalco will make a s. 88(1)(d) designation in respect of each non-depreciable capital property acquired by it on the amalgamation of Bidco and Target Amalco 2
Rulings:
- bump ruling: - including that pursuant to s. 88(4), Target Amalco 2 will be the same corporation as Subco 2, New Target and Target Amalco for the purposes of determining whether property was capital property owned by Target Amalco 2 on the Effective Date and for purposes of determining when Bidco last acquired control of Target Amalco 2
- no shareholder of Parent will be considered to be a specified shareholder of Target or Target Amalco at any time prior to the acquisition of control of Target Amalco by Bidco for the purposes of clause 88(1)(c)(vi)(B)(I) solely as a result of Bidco's conditional right under the Arrangement Agreement to acquire the shares of the capital stock of Target or Target Amalco
- the proposed transactions will not, in and by themselves, result in the application of s. 69(11)
- Parent guarantees of the amended notes of Target will not constitute substituted property as described in s. 88(1)(c.3)
- s. 212.3 will not apply to the acquisition of the shares of Target Amalco by Bidco provided the acquisition occurs before 2013 and is completed in accordance with the terms of the Arrangement Agreement
- s. 212.3(2) will not apply to an investment made in a subject corporation by Target Amalco, Target Amalco 2 or Amalco as a result of the Target Amalgamation, the Target Amalco Amalgamation and the Amalgamation
- s. 212.3(2) will apply to Bidco and to Bid Holdco to the extent that their acquisition of Target Amalco 2 shares and Amalco shares, respectively, resulting from the application of s. 87(4) to the Target Amalco Amalgamation and the Amalgamation, respectively, fall within the meaning of "investment" as described in s. 212.3(10)(f)
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 212.3 - Subsection 212.3(18) - Paragraph 212.3(18)(c) | deemed investment on amalgamation of subsidiary | 757 |
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(c.3) - Subparagraph 88(1)(c.3)(i) | guarantee | 26 |
2008 Ruling 2007-0240271R3 - Purchase and bump
Plan of Arrangement
Under a Plan of Arrangement:
- Rights under rights plans of Target were cancelled and Target stock options, RSUs and DSUs were surrendered to Target for cash equal to their fair market value (net of withholding).
- All Target shares were transferred to Acquisico 1 (a wholly-owned Canadian subsidiary of non-resident Parent) for cash.
- Target elected to cease to be a public corporation.
- Target amalgamated with its wholly-owned resident subsidiary (Subco 2 - which in turn had interests in two subsidiary partnerships and corporate subsidiaries) to form Amalco 1.
- Acquisico 1 amalgamated with Amalco 1 to form Amalco 2 (the "Second Amalgamation").
Proposed transactions
- Amalco 2 will designate an amount within the limits described in s. 88(1)(d) in respect of capital property (other than ineligible property) owned by Target and/or Subco 2 at the effective time of the arrangement, including partnership interest and shares of subsidiaries in its return for its taxation year that commenced at the time of the Second Amalgamation.
- A Stock Purchase Agreement will close for the cash sale by Parent of Amalco 2 and certain US subsidiaries to an arm's length purchaser. The Stock Purchase Agreement and any subsequent transfer by one of the parties to that agreement will not result in any property that became property of Amalco 2 on the Second Amalgamation or "any property acquired by any person in substitution therefor" (within the meaning of that phrase for the purpose of clause 88(1)(c)(vi)(B)) to be acquired by any person described in subclauses 88(1)(c)(vi)(B)(I), (II) or (III) (on the assumption that the "subsidiary" referred to in those subclauses is Amalco 1 and the "parent" is Acquisico 1)."
Bump rulings
include: "[P]ursuant to subsection 88(4), Amalco 1 will be considered to be the same corporation as, and a continuation of, Target and Subco 2 for the purpose of:
- determining when Acquisico 1 last acquired control of Amalco 1; and
- determining whether the [listed partnership interest and subsidiary shares]… were capital property held by Amalco 1 when Acquisico 1 last acquired control of Target.
18 December 2002 External T.I. 2002-0130715 - Availability of Bump After Amalgamation
Over 2/3 of the shares of Target (a Canadian public company) are acquired by a taxable Canadian corporation ("TCC") and its subsidiary ("Parent") in exchange for shares of TCC (with Parent first being issued shares by TCC for immediate delivery as the consideration for the Target shares taken up by Parent). TCC then transfers its Target shares to Parent in exchange for shares of Parent. Parent incorporates Newco and transfers its Target shares to Newco in exchange for Newco shares. Under Alternative 1, Newco, Target and Subco1 and Subco2 (child and grandchild subsidiaries of Target, with Subco2 holding the "Sellco" and "Keep Assets") are amalgamated to form NewTarget. The minority shareholders of Target receive preferred shares of NewTarget on the amalgamation which are redeemed and Parent receives NewTarget common shares. Parent and NewTarget then amalgamate to form NewTarget2.
In confirming that for the purpose of applying s. 87(11)(b) to determine the cost of the Keep Assets and the Sell Assets to NewTarget2, (i) the TCC shares acquired by former Target shareholders will be "specified property" under s. 88(1)(c.4)(iii), and (ii) NewTarget will be considered to be the same corporation as, and a continuation of, Subco2 for the purpose of determining whether the Keep Assets and the Sell Assets were capital property owned by NewTarget at the time that Parent last acquired control of NewTarget, CRA stated:
[W]hen interpreting subsection 88(4) in a particular situation, the corporation formed as a result of an amalgamation is deemed to be the same corporation as, and a continuation of, the predecessor relevant to that situation, having regard to all the circumstances including the provision to which subsection 88(4) is being applied. Therefore… we would apply subsection 88(4) such that the TCC shares issued to the former Target shareholders would be considered to be received as consideration for the acquisition of shares of the subsidiary, NewTarget, (because NewTarget is deemed to be the same corporation as, and a continuation of, Target) by TCC and Parent (which are, respectively, the taxable Canadian corporation and the parent referred to in subparagraph 88(1)(c.4)(iii)). It is our view that subsection 88(4) will apply to deem NewTarget to be the same corporation as, and a continuation of, Subco2 when considering whether NewTarget (the subsidiary) owned the Keep Assets and the Sell Assets when control of NewTarget was last acquired and when considering when control of NewTarget (the subsidiary) was last acquired by Parent. In this context, Subco2 is the relevant predecessor, for the purpose of applying paragraph 88(4)(b), because Subco2 owned the property in question at the time that control was last acquired.
In Alternative 2, Newco and Target amalgamate to form NewTarget, with Parent receiving NewTarget common shares and the minority shareholders of Target receiving preferred shares of NewTarget which then are redeemed for cash. NewTarget, Subco1, and Subco2 amalgamate to form NewTarget2, and Parent and NewTarget2 amalgamate to form NewTarget3.
CRA confirmed (similarly to the above analysis) that, because of the operation of s. 88(4), NewTarget2 will be considered to be the same corporation as, and a continuation of, Target for the purpose of the reference to "subsidiary" in subparagraph 88(1)(c.4)(iii); and that NewTarget2 will be considered to be the same corporation as, and a continuation of, Subco2 for the purpose of determining whether the Keep Assets and the Sell Assets were capital property owned by NewTarget2 at the time Parent last acquired control of NewTarget2.
2001 Ruling 2001-0110363 - XXXXXXXXXX
Completed bid
Pubco and its wholly-owned subsidiary Acquisitionco acquired all the shares of Target in consideration for Pubco shares (with Pubco issuing Pubco shares for delivery by Acquisitionco as consideration to those shareholders of Target transferring their shares to Acquisitionco). Acquisitionco acquired those shares of Target not tendered to the offer pursuant to the applicable compulsory acquisition provisions. Pubco transferred its Target shares to Acquisitionco for additional common shares of Acquisitionco.
A wholly-owned subsidiary of Target (TargetSubA), a wholly-owned subsidiary of TargetSubA (TargetSubA1) and PubcoSub (partly owned by Target) were the three general partners of A Target Partnership.
Proposed transactions
.
- TargetSubA and Target will be amalgamated to form Target Amalco.
- Subsequently, PubcoSub and Target Amalco will be amalgamated to form New Amalco.
Subsequent amalgamation
There may be a subsequent wind-up or vertical amalgamation of New Amalco, which is expected to result in an increase in the ACB of the Target Partnership A Units held by AcquisitionCo or the new corporation, as the case may be, pursuant to ss. 88(1)(c) and (d). As there are current impediments to this subsequent step, it is not included in the scope of the ruling letter.
Rulings
A. For the purposes only of applying paragraph 88(1)(c) to determine the cost of the Target Partnership A Units that were owned by TargetSubA on the Take-Up Date, following the amalgamation described in paragraph 17 above, pursuant to subsection 88(4),
- (i) Target Amalco will be considered to be the same corporation as, and a continuation of, Target, for the purposes of applying the reference in subparagraph 88(1)(c.4)(iii) to "the subsidiary"; and
- (ii) Target Amalco will be considered to be the same corporation as, and a continuation of, TargetSubA, for the purposes of determining whether Target Partnership A Units were capital property owned by Target Amalco on the Take-Up Date, and for the purposes of determining when AcquisitionCo last acquired control of Target Amalco.
B. For the purposes only of applying paragraph 88(1)(c) to determine the cost of the Target Partnership A Units that were owned by TargetSubA on the Take-Up Date, following the [2nd] amalgamation...pursuant to subsection 88(4),
- (iii) New Amalco will be considered to be the same corporation as, and a continuation of, Target, for the purposes of applying the reference in subparagraph 88(1)(c.4)(iii) to "the subsidiary"; and
- (iv) New Amalco will be considered to be the same corporation as, and a continuation of, TargetSubA, for the purposes of determining whether Target Partnership A Units were capital property owned by New Amalco on the Take-Up Date, and for the purposes of determining when AcquisitionCo last acquired control of New Amalco.
8 March 1990 T.I. (August 1990 Access Letter, ¶1375)
Where Holdings (a private Canadian corporation which deals at arm's length with Target) incorporates a wholly-owned subsidiary ("Acquisition"), capitalizes Acquisition with cash in exchange for common shares, and following an amalgamation of Acquisition and Target by virtue of which Holdings receives common shares of Amalco, receives shares of a subsidiary of Amalco on a winding-up of Amalco under s. 88(1), s. 88(4) will apply to prevent a "bump" of the shares under s. 88(1)(d).
Articles
Paul Stepak, Eric C. Xiao, "The 88(1)(d) Bump – An Update", 2013 Conference Report (Canadian Tax Foundation), pp.13:1-60
Is debt of Target non-specified property after it is amalgamated with Bidco? (pp. 13:16-18)
On a literal reading of old paragraph 88(1)(c.3), indebtedness of the subsidiary, the parent, and anyone up the chain of ownership is attributable property. Therefore, any loans made to finance the acquisition would constitute substituted property acquired as part of the series. A more technical concern arose with respect to historical debt of the subsidiary in that upon the winding up or amalgamation, the creditors arguably acquired new property, presumably as part of the series. Therefore, there was a concern that the bump could be denied if lenders to the buyer group or the subsidiary were prohibited persons...
Subparagraph 88(1)(c.4)(ii) was amended to extend to indebtedness issued for consideration that consists solely of money….
Generally, if the borrower is at a level anywhere above Bidco, no further issues should arise provided no reorganization is undertaken that involves the borrower as part of the series. However, if the debt is borrowed by Bidco itself, a technical concern arises on the subsequent amalgamation of Bidco and Target: has the holder of the Bidco debt acquired attributable property that is not specified property-- namely, a debt of Amalco acquired as a result of the amalgamation (rather than debt issued for money)?
[P]aragraph 87(2)(a) deems Amalco to be a new corporation for the purposes of the Act, and the cost rule in subsection 87(6) appears to presume that there is a disposition by a holder of debt of a predecessor upon an amalgamation. The deemed acquisition of the Amalco debt on the amalgamation does not appear to fit squarely into the definition of specified property as the Amalco debt is not issued as consideration for the acquisition of the Target shares, and it is not clear whether it continues to be issued solely for money. The same issue arises where the existing debt of Target or any vendor-take-back notes issued by Bidco to shareholders of Target become debt of Amalco as a result of the amalgamation.
Does paragraph 88(4)(b) resolve this potential issue?...
The Joint Committee made a submission on this point; however, no changes were made by Finance in response. It stands to reason that Finance believes that no changes are needed…
We also note that the CRA has ruled favourably [fn 63: document no. 2006-0205771R3,2007] in the context of a short-form amalgamation dealing with the Amalco shares. The CRA states that the Bidco shares issued to Target shareholders and which became Amalco shares on the Amalgamation did not constitute substituted property….
[W]e submit that paragraph 88(4)(b), when read in context, should reasonably be considered to have the effect of deeming the securities of Amalco to be the same as the securities of the predecessor corporation….
Commentary
S. 88(3.4)(b) essentially provides that a suppression election is invalid if the "claimed amounts" (in aggregate, the amount by which the taxpayer elects to reduce what otherwise would by the proceeds of disposition of its shares of the disposing affiliate) exceeds what otherwise would be the capital gain on the taxpayer's disposition of its shares of the disposing affiliate in the absence of the suppression election. Accordingly, if the taxpayer makes the suppression election on the basis of estimated proceeds of disposition of its shares of the disposing affiliate (based on their relevant cost base and the applicable exchange rate at the time of disposition) that later turns out to have been too high or on the basis of an estimated adjusted cost base for its shares of the disposing affiliate that later turns out to have been too low, the election will be invalidated.
S. 88(3.4)(a) requires that the claimed amount in respect of each property not exceed the amount determined under s. 88(3)(a), i.e., its relevant cost base - otherwise the election also is invalidated.
Regs. 5911(3) and (4) potentially allow an "amended" suppression election to be filed within 10 years of the timely "making" (not "filing") of an initial election and to be accepted in the discretion of the Minister if the taxpayer made "reasonable efforts" in determining the relevant amounts for the initial election. It is not clear whether the invalidation of an initial election would preclude its amendment under these provisions, although a purposive interpretation would suggest that this can be done.