Trans World Oil & Gas Ltd. v. The Queen, 95 DTC 260 (TCC), briefly aff'd 98 DTC 6060 (FCA)
A U.S. resident corporation ("Trans World U.S.") that incurred business losses while it was owned by a Canadian-resident individual and then was subsequently transferred by the individual to the taxpayer, which also was controlled by the individual. Subsequently, Trans World U.S. earned fapi.
Bowman TCJ. found that under Regulation 5903(1)(b)(i), the foreign affiliate that sustains the active business losses in the prior years (Trans World U.S.) must have been a foreign affiliate of the taxpayer corporation in the years when it sustained those losses, and that it must be a foreign affiliate of the same corporation in respect of which the fapi is to be determined in a subsequent year. Accordingly, the business loss in question was non-deductible.
Bowman TCJ. stated (at p. 267):
"The object behind the FAPI rules was to discourage Canadians from parking investments in off-shore companies (usually tax havens), or, if they did, at least to require them to pay taxes currently on the income so generated. That object would be defeated if a Canadian resident were permitted to acquire from a third party a company, resident in a listed country, with accumulated active business losses and use those losses to offset both the income taxable in that country ... and the passive income taxed under subsection 91(1)."
21 October 1992 Memorandum (Tax Window, No. 27, p. 13, ¶2345; October 1993 Access Letter, p. 476)
Where the amalgamation of two unrelated taxable Canadian corporations precedes the merger of their respective wholly-owned U.S. subsidiaries under a foreign merger as defined in s. 87(8.1), Regulation 5903(3) will specifically include in the deductible loss calculation of the U.S. amalgamated corporation the deductible losses which arose during the periods throughout which the two U.S. predecessors were foreign affiliates of their respective Canadian parents.
An Iceland “Sameignarfelag” (viewed by CRA as a partnership), which had been serving as a Finco to foreign affiliates in a Canadian multinational group was wound up into its non-resident partners (NR1 and NR2, wholly-owned by Canco2). Since the partnership interests were not excluded property at the time of their disposition on the winding-up, their ACB was to be computed in Canadian dollars under Reg. 5908(10) which, in turn, meant that NR1 and NR2 realized a capital loss for FAPI purposes on the partnership wind-up.
The principal former partner was NR1. Canco2 transferred NR1 to the non-resident subsidiary (NR3) of its Canadian sister (Canco1 – which, like Canco2, was wholly-owned by the Canadian parent of this multinational group). NR1 was then wound-up into NR3.
CRA accepted that under Reg. 5903(5)(b), which deems the parent foreign affiliate on a designated liquidation and dissolution under s. 95(2)(e) to be the same corporation as and a continuation of the dissolved foreign affiliate for specified purposes, NR1 would be able for FAPI purposes to carry forward the loss of NR1, but that NR3 was precluded from carrying back that loss to prior taxation years. In this regard, the Directorate stated:
[S]ubject to meeting the other requirements of section 5903, as a result of the application of paragraph 5903(5)(b), the FAPL of [NR1] for its pre-dissolution taxation years will be available to reduce the amount of [NR3]’s FAPI for its post-dissolution taxation years. It would also be possible for [NR3] to apply a FAPL for a post-dissolution taxation year to a pre-dissolution taxation year.
However … the deeming rule does not permit the use of a FAPL of a dissolved subsidiary for a pre-dissolution taxation year to reduce the FAPI of a parent for one of its pre-dissolution years … . The calculation of FAPI is done on an affiliate-by-affiliate basis. The FAPL of an affiliate for a taxation year may only be used to reduce the amount of that affiliate’s FAPI for another taxation year. Netting the amount of FAPL for a year of one affiliate against the FAPI of another affiliate is not permitted. Permitting the use of the subsidiary’s FAPL against the FAPI of the parent for a pre-dissolution taxation year goes against this principle.
|Locations of other summaries||Wordcount|
|Tax Topics - Income Tax Act - Section 95 - Subsection 95(1) - Excluded Property||partnership interests no longer were excluded property on dissolution given prior disposition of s. 95(2)(a)(ii) loans||501|
|Tax Topics - Income Tax Regulations - Regulation 5908 - Subsection 5908(10)||partnership interests no longer were excluded property on dissolution given prior disposition of s. 95(2)(a)(ii) loans/potential qualification of partnership interest under para. (c) ignored||289|
|Tax Topics - Income Tax Act - Section 96||Icelandic Sameignarfelag was partnership||167|
|Tax Topics - Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(f.14)||once partnership interests were no longer excluded property, the components of their ACB calculation was to be translated at the rates when those components first arose||240|
|Tax Topics - Income Tax Act - Section 98 - Subsection 98(2)||partnership interest disposition occurred no sooner than final distribution date||77|