Section 88

A new corporation (the Taxpayer) was formed to acquire most of the remaining assets of a corporation (Lossco) that, together with its parent (Parentco) was in CCAA proceedings. It then continued to carry on that business in a similar manner, including hiring most of the employees and, in fact, hiring some more. Later, the Taxpayer acquired the shares of Lossco (which at that point had only nominal assets and no business or employees), and wound-up and dissolved Lossco. It was specified that the PUC of the Lossco shares would be reduced immediately before its wind-up to an amount “not less than” the (modest) cost amount of the Lossco assets. In addition to ruling that s. 88(1.1) was generally available to flow through the Lossco non-capital losses (as reduced by some debt forgivenesses that had occurred under the CCAA court order) to the Taxpayer, CRA ruled:

[T]he Taxpayer will be deemed, pursuant to paragraph 88(1)(b), to dispose of its Lossco Shares for Proceeds of Disposition equal to the greater of the amounts described in subparagraph 88(1)(b)(i) and (ii).

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.

GAAR will not usually be applied to a pre-dissolution reduction of paid-up capital.

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.

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… .

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.

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.)

In the situation where the Canadian target holding a foreign affiliate (FA) is wound up into the Canadian acquisition company (resulting in a "bump" to the ACB of the shares of FA under s. 88(1)(d)) and those shares are then distributed by the acquisitionco to its foreign parent within a reasonable time of the acquisition of the Canadian target and 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.

Regarding its position regarding a late designation under ss. 88(1)(d) and 87(11), CRA stated:

... CRA ... allow[s] on an administrative basis, a late designation under paragraph 88(1)(d) to the extent that:

1) the parent corporation (or the amalgamated corporation where subsection 87(11) applies) agrees to allocate the excess calculated in paragraph 88(1)(d) pro rata to capital property that is eligible for an "increase" in cost, based on the available excess as calculated under subparagraph 88(1)(d)(ii) of the Act; or

2) the parent corporation (or the amalgamated corporation where subsection 87(11) applies) agrees to have the CRA determine, in its discretion, what amount of the excess will be added to the cost of which property.

… [T]he CRA [will not] accept a late designation if it is for retroactive tax planning purposes, if the designation is part of a tax avoidance scheme, or if it is necessary, in order to give effect to the designation, to issue a … reassessment … [where] the normal reassessment period … has expired.

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.

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.

No late election can be made under s. 88(1)(d).

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.

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.

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.

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.

Father bequested his shares of an investments holding company (Aco) directly to his surviving wife (Mother) and to a spousal trust (Trust) for her. Following the death of Mother, her estate and Trust were to engage in a pipeline transaction under which:

• The estate and Trust transfer their Aco shares under s. 85(1) to a Newco of Trust in consideration for Newco preferred shares.
• After a specified period, Newco amalgamates with Aco, and redeems the preferred shares for notes.
• Amalco will repay the notes at no more than a specified rate over the period commencing with their issuance.

CRA rulings included that ss. 88(1)(d.2) and (d.3) deem Newco to have last acquired control of Aco immediately following Mother's death (regarding a bump of shares held by Aco on the amalgamation).

2009-0350491R3 ruled on the use of an alter ego trust of the s. 88(1)(d) bump following the death of its settlor and life beneficiary (Mr. X). At the time of his death, the trust held a holding company (Xco) with a number of subsidiaries. Following the death of Mr. X, the trust transferred its Xco shares to a Newco formed by it, and caused Xco to be wound-up with a view to having the tax basis of the subsidiaries’ shares bumped under s. 88(1)(d). The trust deed for the alter ego trust directed that such sale to Newco followed by Xco’s winding-up would occur following Mr. X’s death, so that, on this basis, the parent (Newco) acquired the subsidiary (Xco) as a consequence of Mr. X’s death, so that s. 88(1)(d.3) relieved from the application of ss. 88(1)(d.2) and 88(1)(d)(ii)(A) and the s. 88(1)(d.3) bump designation could use the stepped-up ACB of the Xco shares. The CRA ruling summary stated:

Shares of subsidiary are acquired as a consequence of death pursuant to the directions of the settlor in the terms governing the alter ego trust, trustees of the alter ego trust under equitable obligation to transfer shares of subsidiary to parent on the death of the settlor.

CRA now confirmed that it “has not modified its views on the application of s. 88(1)(d.3) in the circumstances described in that [2010] document.”

It also indicated that the deemed reacquisition, pursuant to s. 104(4), of the Xco shares on the death of the settlor of the alter ego trust (Mr. X) would not have resulted in an acquisition of control of the corporation by the alter ego trust as “a consequence of the death of [the] individual” stating that such deemed re-acquisition would not detract from the shares continuing to be legally owned by the trust, so there would be no transfer of the legal ownership of those shares that would result in an acquisition of control.

Around when he was placed in a long-term care facility, the “Deceased” transferred his shares of two companies with investing businesses (Aco and Bco) on a s. 73(1) rollover basis to a newly-formed alter ego trust (“AE Trust”) of which a child (“Child 1”) was the trustee, and Child 1, Child 1’s spouse and their three adult children were beneficiaries with entitlements to income and capital as determined in the discretion of the trustee (except that he could not distribute capital to himself). On the death of the Deceased, there was a deemed disposition of the Aco and Bco shares for their FMV pursuant to s. 104(4)(a).

A conventional pipeline was to be implemented under which AE Trust transferred its common shares of Aco and Bco on a s. 85(1) rollover basis to a “Newco” in consideration for two notes of Newco and nominal-value preferred shares with a price adjustment clause and, after the passage of (presumably) one year, Newco would be amalgamated with Aco and Bco, and the notes would then be gradually repaid.

The rulings included the application of s. 88(1)(d.3) to the amalgamation, so that securities of Aco and Bco held before the death could be bumped.

CRA ruled on pipeline transactions respecting common shares of Opco which the deceased held on death, in which:

• the estate transfers its common shares of Opco to the Newco newly-incorporated by it mostly in consideration for a demand note of Newco
• at least 12 months thereafter, Opco amalgamated with Newco.
• in connection with the amalgamation, Amalco designates, in its return of income for its first taxation year, an amount under ss. 87(11) and 88(1)(c) and (d) to bump the ACB of land that had been held (as capital property) continuously by Opco from before the date of the death until immediately prior to the amalgamation.
• the Newco note is gradually repaid over a period of at least one year after the amalgamation, with Amalco continuing to carry on the business.

CRA ruled inter alia that the bump was available having regard to the benefit of the s. 88(1)(d.3) rule.

The terms of an alter ego trust (the “Trust”) established by Mr. X, and to which he had transferred all the common shares of XCO (which, in turn, wholly-owned subsidiaries), provided that, following his death, the Trust was to transfer such common shares of XCO to a newly-formed subsidiary of the Trust (Newco), with the agreed amount designated under the s. 85(1) election being the transferred shares’ FMV.. Thereafter, XCO will be wound up and the shares of the subsidiaries distributed by XCO to Newco, with Newco making a bump designation pursuant to s. 88(1)(d) in respect of the distributed shares.

Rulings regarding inter alia the s. 88(1)(d) bump. Regarding the application of s. 88(1)(d.3) to the shares of XCO, CRA stated in its summary:

Shares of subsidiary [XCO] are acquired as a consequence of death pursuant to the directions of the settlor [Mr. X] in the terms governing the alter ego trust, trustees of the alter ego trust under equitable obligation to transfer shares of subsidiary to parent [Newco] on the death of the settlor.

Opco, which is wholly-owned by Holdco, and has been using the percentage-of-completion method in computing its income from its construction business, has excluded deferred revenue from its income. What is the treatment of those amounts on the winding-up of Opco into Holdco pursuant to s. 88(1)?

CCRA indicated that the deferred revenue would be included under s. 12(1)(a) and a reserve could be claimed under s. 20(1)(m) to the extent the amounts were not billed. Furthermore, pursuant to s. 88(1)(e.1), “Opco would be able to deduct a reserve pursuant to paragraph 20(1)(m) for the taxation year in which it distributed its assets to Holdco in the course of its winding-up as if the distribution of its assets had not occurred” and Holdco would be required pursuant to ss. 88(1)(e.2), 87(2)(g) and 87(2)(j) to add back that reserve to its income in the taxation year ending with the winding-up, with the ability to claim a fresh reserve, where appropriate.

Favourable ruling that the exemption in s. 212(1)(b)(vii) continued following a wind-up of the debtor corporation under s. 88(1).

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.

The Directorate indicated that where a subsidiary was wound up into its parent, the parent could not claim unused investment tax credits ("ITCs") of the subsidiary against the tax otherwise payable by the parent under Part I for a taxation preceding that in which the subsidiary was wound up, noting in this regard that the s. 88(1)(e.3) deeming rule was only applicable for the purpose of computing the parent's ITC at the end of any taxation year ending after the subsidiary was wound 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).

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.

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.

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.

Following the death of the father, his preferred shares of a CCPC (“Opco”), that held only cash as a result of having sold all its marketable securities, were distributed by his estate to his three beneficiaries (his three children), and then Opco was divided equally between the three holding companies (Holdcos A, B and C) for the three children’s families, each holding 1/3 of the Opco common shares.

Rulings included that on the winding-up, Holdcos A, B and C will be deemed to have received dividends pursuant to ss. 88(2)(b) and 84(2) equaling the excess of the amount distributed on their Class A, B or C shares of Opco over those shares’ PUC.

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... .

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.

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.

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)

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:

1. determining when Acquisico 1 last acquired control of Amalco 1; and
2. determining whether the [listed partnership interest and subsidiary shares]… were capital property held by Amalco 1 when Acquisico 1 last acquired control of Target.

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.

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

.

1. TargetSubA and Target will be amalgamated to form Target Amalco.
2. 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.

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).