2014-0560421I7 FX losses on CFA wind-up

Principal Issues: 1. Does subsection 69(5) apply to the disposition of the shares of the CFA on its winding-up and, therefore, in and of itself cause subsection 40(3.6) to not apply? 2. Whether the reasoning in 2012-0436921I7 is applicable to deny the shareholder's loss on the disposition of CFA shares disposed of in a winding-up where the loss is primarily due to FX fluctuations?

Position: 1. No 2. No

Reasons: 1. Subsection 88(3) applies to the winding-up of the CFA and it operates notwithstanding subsection 69(5). Moreover, subsection 88(3) does not refer to subsection 40(3.6). 2. The situation in 2012-0436921I7 is factually different from the case at hand.

Author: Carruthers, Lori
Section: 40(3.6), 69(5), 88(3)

                                                                                                                                            January 12, 2015

      QUEBEC REGION                                                                                                        HEADQUARTERS
      Montreal Tax Services Office                                                                                         Income Tax Rulings
      Aggressive Tax Planning Section                                                                                  Directorate
      Attention: Louis Luponio     
                                                                                                                                            2014-056042

      Foreign Exchange based capital losses on the winding-up of a controlled foreign affiliate

We are writing further to our letter to you of August 15, 2014 (2014-0538591I7) in which we discussed, inter alia, whether the reasoning in 2012-0436921I7 was applicable to deny a foreign exchange loss realized by a Canadian resident corporate shareholder (the “shareholder”) on the winding-up of its wholly owned controlled foreign affiliate (the “CFA”). 

The purpose of this letter is acknowledge that as a result of subsection 88(3) of the Act applying to such a winding-up, subsection 69(5) of the Act would not apply and, therefore, subsection 69(5) would not, in and of itself, cause subsection 40(3.6) of the Act to not apply to the shares of the CFA disposed of by the shareholder on the winding-up. This is so because subsection 88(3) operates notwithstanding subsection 69(5). Moreover, subsection 88(3) does not refer to subsection 40(3.6).

That being said, in the case of the winding-up of the CFA, we continue to question how the CFA could be affiliated with the shareholder immediately after the shareholder’s disposition of the CFA shares (a requirement for the application of subsection 40(3.6)). We would expect that, under the foreign corporate law, the CFA would cease to exist and its shares would simultaneously be cancelled when the CFA was wound-up.  To summarize, we remain of the view that the reasoning in 2012-0436921I7 is not applicable to the case at hand due to the factual differences between the two situations.

We would also take this opportunity to note that:

*     our comments in 2014-0538591I7 regarding subsection 93(2.01) of the Act were made under the assumption that the shareholder had not carried out an avoidance transaction that resulted directly or indirectly in a misuse of any provisions of the Act or an abuse having regard to the provisions of the Act read as a whole, such that subsection 245(2) of the Act would not be applicable to the winding up of the CFA; and
*     it was, and remains, our understanding that no shares of the capital stock of a foreign affiliate of the shareholder were acquired by the shareholder on its disposition of the CFA shares, such that subsection 93(4) of the Act would not be applicable to the winding up of the CFA.

We trust these comments will be of assistance.

Yours truly,

Lori M. Carruthers CPA, CA
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy Regulatory Affairs Branch

cc: International and Large Business Directorate
      Aggressive Tax Planning Division
      Non-Resident Trust and Foreign Investment Entities Section
      344 Slater Street
      Canada Bldg, 5th Floor
      Ottawa, Ontario K1A 0L5

   International and Large Business Directorate
   International Tax Division
   International Advisory Services Sections
   344 Slater Street
   Canada Bldg, 6th Floor
   Ottawa, Ontario K1A 0L5

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