Words and Phrases - "merged or combined"

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 will wind-up FA and elect to treat this as a qualifying liquidation and dissolution under s. 88(3). Does the deemed continuity rule in s. 40(3.5)(c)(i) apply?

CRA indicated that it considered the phrase “merged or combined” in s. 40(3.5)(c)(i) as encompassing a winding-up or liquidation. This was supported by the exclusion in various provisions of a winding up or liquidation from a “merger” including s. 87(1), 87(8.1), 7(8.2), the definition of “Canadian corporation” in s. 89(1), and s. 128.2(3). Similarly, s. 40(3.5)(c)(i) carves out from a merger or combination a number of reorganizations referred to in s. 40(3.5)(b), which in turn refers to ss. 51, 86, 87, and 85.1.

“Formed” as used in s. 40(3.5)(c)(i) also is broadly interpreted to include 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). Accordingly, the reference to the corporation “formed” would include Subco. Thus, the deemed continuation rules in s. 40(3.5)(c)(i) apply to the wind-up of FA, so that Canco’s loss remains suspended.