Words and Phrases - "formed"
26 January 2018 Internal T.I. 2017-0735771I7 - Application of paragraph 40(3.5)(c)
ACo, a Canadian public corporation, held the shares of three controlled foreign affiliates (CCo, DCo and BCo directly. Shares (that were excluded property) of a fourth CFA (FCo) with an accrued loss were held by CCo directly and by DCo through its subsidiary, ECo.
- ECo transferred all of its shares of FCo to BCo in exchange for Class B common shares of BCo, having an equivalent fair market value, that tracked ECo’s indirect interest in FCo.
- ACo transferred all its shares of CCo to BCo as a contribution of capital, thereby generating a suspended loss as per s. 40(3.4) (the “Suspended Loss”).
- CCo was liquidated into BCo in a designated liquidation and dissolution (“DLAD”) occurring on a rollover basis under s. 95(2)(e), so that BCo acquired all of CCo’s Class B shares of FCo and some nominal cash.
Did the liquidation of CCo result in the Suspended Loss becoming available pursuant to s. 40(3.4)(b)(i)?
Respecting whether there was a “merger” of CCo with BCo as per s. 40(3.5)(c)(i), the Directorate stated:
[S]uch term is broad and encompassing and may include a winding-up. Furthermore … had Parliament intended to exclude a winding-up from the reference to “merger” in subparagraph 40(3.5)(c)(i), it would have specifically done so by incorporating exclusionary wording to that effect, as was done in subsections 87(1), 87(8.1), 87(8.2), 89(1) and 128.2(3) … [which] carve out a winding-up … . Lastly, the various provisions referred to in paragraph 40(3.5)(b) and the carve-out of these provisions in the context of the term “merger” in subparagraph 40(3.5)(c)(i), lends additional support for the broadness of that term as used in the context of subsection 40(3.5).
In finding that BCo also was “formed” on such merger, the Directorate stated:
Based on the wording of subparagraph 40(3.5)(c)(i) and the specific carve out of a number of transactions in paragraph 40(3.5)(b) that do not result in a corporation being “formed” in the traditional sense, it is evident that the use of the word “formed” should be broadly interpreted within the context of the provisions at hand. This is further evidenced by the use of the word “formed” in subsections 87(1), 87(8.1) and 128.2(1).
In further finding that its conclusion - that the Suspended Loss continued to be suspended - was supported by the purpose of the suspended loss rules, the Directorate stated:
[T]he purpose of the stop-loss rules in subsections 40(3.3), 40(3.4) and 40(3.5) is to defer the recognition of losses incurred in an affiliated-party. Such purpose becomes especially evident or useful in circumstances that reveal there to be no true economic loss incurred by the transferor or by the affiliated group as a whole.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.5) - Paragraph 40(3.5)(b) | scope of s. 40(3.5)(b) extends to mergers and constructive formation of new entities | 443 |
| Tax Topics - Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(e) | S. 95(2)(e) wind-up constructively resulted in formation of new corporation | 79 |
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 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.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(3) | s. 88(3) wind-up of CFA formed a new corporation | 173 |