Words and Phrases - "insolvent"
16 December 2003 Internal T.I. 2003-0046167 F - Section 50- Shares of Insolvent Corporation50(1)
Parentco elected (in reliance on s. 50(1)(b)(iii)) under s. 50(1) respecting its shares of one of a wholly-owned subsidiary ("Lossco") with non-capital loses but no assets or liabilities. It subsequently sold its Lossco shares to a profitable wholly-owned subsidiary ("Profitco") for nominal cash consideration, with Lossco then being wound-up into Profitco under s. 88(1) so that Profitco could then access Lossco's non-capital losses pursuant to s. 88(1.1).
In doubting the satisfaction of the s. 50(1)(b)(iii) conditions, the Directorate stated:
The dictionary definition of "insolvent" is as follows "One who is unable to pay his debts". Thus … a corporation with no assets or liabilities at the end of a taxation year (or a corporation with no liabilities at that time) cannot generally be considered insolvent for the purposes of subparagraph 50(1)(b)(iii). In addition, a corporation in a loss-making position or without adequate financing is not necessarily an insolvent corporation. This could be the case where persons controlling a loss-making corporation, or other entities in the same corporate group, intend to provide in some way for the payment of the creditors of the loss-making corporation [citing Jacques St-Onge Inc. v. The Queen, 2001 DTC 487 (T.C.C.)]
The condition set out in clause 50(1)(b)(iii)(C) is that the FMV of the shares subject to the subsection 50(1) election must be nil. … [T]he valuation of those shares should normally take into account accumulated tax losses that may eventually be deductible in calculating a corporation's taxable income, as stated in question 5 of the 1992 APFF Conference Roundtable.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) | sale of Lossco with no assets but non-capital losses for nil consideration to another subsidiary generated a gain under s. 69(1)(b) | 125 |
| Tax Topics - General Concepts - Fair Market Value - Shares | shares of corporation that had ceased business and had no assets but had non-capital losses had a significant value | 75 |
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 wound-up 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 a BIL 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).
Before addressing the loss transfer issue raised in the question (and further noting that the transfer by Brother B of his Lossco shares to Profitco gave rise to a capital loss (i.e., not a business investment loss) subject to the loss being limited by s. 69(1)(b)), CRA indicated that it was "not evident" that the conditions in s. 50(1)(b)(iii) for realizing a capital loss under s. 50(1) were satisfied in either example, stating (TaxInterpretations translation):
...[I]t is necessary to attribute to the word "insolvent" its ordinary meaning, as this term is not defined in the ITA. A dictionary definition defines the term 'insolvent" as follows: "Being no longer able to pay one’s debts." Consequently, a corporation which has neither assets nor liabilities at the end of a taxation year (or, in any event, has no liabilities at that time) cannot generally be considered insolvent for purposes of ITA subparagraph 50(1)(b)(iii).
The condition provided in clause 50(1)(b)(iii)(C) is that the fair market value of the shares which are subject to the election under subsection 50(1) must be nil. In this regard, it appears to us that the valuation of the shares in the situations described above would normally take into account the accumulated tax losses which can eventually be deducted in the computation of a corporation's income.
| 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 | 162 |
| 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 | 267 |
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1.1) | lossco losses maintained on father-son or sibling transfers and s. 88(1.1) wind-up | 266 |
15 June 1998 Internal T.I. 9802347 - BUSINESS INVESTMENT LOSSES
A corporation that had made a general conveyance of all its assets to its shareholder in the course of voluntary dissolution proceeding, with the shareholder assuming all its liabilities, was not insolvent, i.e., unable to pay its debts.